Note: CBDCs constitute a new form of money made possible by the evolution of decentralized technologies. CBDCs can be launched via different technological and architectural constructs, including completely decentralized solutions and hybrids (mostly chosen by central banks) with some centralized elements. Each kind of approach has various implications for a country’s financial system and overall economy. Due to Everscale’s cutting-edge technical stack, it can serve as a platform for CBDCs irrespective of both the design choice approved by a central bank and the size of the population being served. To illustrate the case for the Everscale blockchain as a platform for issuing, managing, transacting and removing CBDCs from circulation (yes, money is sometimes withdrawn from the system), we will be launching a series of three articles on the subject.
Since the most important characteristics a CBDC platform must provide are security, scalability and flexibility, our first article delves into two technological solutions that allow the Everscale blockchain to succeed at providing all three with maximum efficiency.
Since the Ethereum Enterprise and Ripple’s CBDC platform have been chosen by several countries (Sweden, Norway, Australia, Israel, Montenegro) as the technological providers for their CBDCs, our next article will compare and contrast how Everscale, Ethereum, and Ripple tech stacks up in terms of CBDC application and technological readiness.
Our last article will be experimental in nature and simulate in detail a hypothetical case, where a country X with a population of 100 mln launches its digital currency on the Everscale blockchain. We will show how all kinds of payments — from buying a cup of coffee to making a cross-border transfer — can potentially work on an Everscale CBDC platform.
How the traditional payment system works: The advantages of CBDCs
Prior to CBDCs, there were two forms of money: cash and electronic (bank accounts).
Payments go directly from one person to another. No third-party actors such as payment providers are required to settle such transactions. However, even if there is no payment provider, still there is the need for an institution to issue and distribute cash. In most countries, these functions are undertaken by central banks.
Technically, the quickest and easiest electronic payment processing happens when both buyers and sellers are customers of the same bank. In this case, payments are processed by simply deducting the required amount from account A and crediting it to account B.
Things get more difficult when purchasers and sellers have accounts in different banks. In this case, payment settlement requires a third-party financial infrastructure, which plays two important roles. First, it communicates transaction information between the parties involved. Second, it transfers the amount required between different banks. In most cases, these actions are performed by a clearing organization.
The animation below illustrates what a payment workflow involving a third-party infrastructure looks like.
There are several actors:
- Bank A — where the purchaser has an account
- Bank B — where the seller has an account
- Clearing organization — the entity facilitating the exchange of information between banks
- Settlement system — the infrastructure provided by a central bank where all banks have accounts
The purchaser initiates a payment by instructing his bank to transfer 100 currency units to the seller. The funds must be moved from Bank A to Bank B. For this, the purchaser’s bank sends the payment information to the clearing organization. Once the information has been processed, instructions are sent to the settlement system where the final transfer of money between Bank A and Bank B is made. A confirmation of the transfer is sent to Bank B via the clearing organization, after which Bank A credits the seller’s account in Bank B and informs their client that the money has been received. To settle the payment, there are three commission fees charged: the purchaser’s bank fee (the smallest in most cases), the seller’s bank fee (the highest in most cases) and the clearing fee.
What is a CBDC?
A CBDC is a new form of money made possible by the advancement of decentralized technologies. It’s worth noting that, in terms of money functions such as medium of exchange, unit of account and store of value, the three forms of money are equal. In the past few years, there has been a great amount of research conducted by both public and private actors which eventually transformed a promising but rather limited (in terms of applicability) blockchain technology into a secure and efficient platform capable of hosting large customer bases in a trouble-free manner. Everscale has played a big role in this respect, succeeding in achieving several important milestones (scalability, programmable accounts), which have given the blockchain the ability to host a CBDC system for any country in the world.
As its name suggests, a Central Bank Digital Currency (CBDC) is issued, managed and guaranteed by a central bank. By issuing we mean that the bank decides on the number of currency units to be minted. That’s due to most banks opting for third-party CBDC infrastructure providers rather than designing their own CBDC platform from scratch, which is not an easy endeavor. Building a green field platform could take years to design and fully launch.
With a CBDC in place, payments will be much cheaper and faster, particularly in countries with underdeveloped payment systems. The introduction of this new form of money will also create the necessary conditions for reductions to payment commissions. This is due to the fact that increased competition always leads to price drops. At the same time, it will diminish the dependence of users on individual payment providers and increase the stability of a country’s overall financial system.
In recent years, in most countries, the use of electronic payment systems has been growing exponentially. In light of this, CBDCs can become a new convenient means of payment for both buyers and sellers, including in remote, sparsely populated and hard-to-reach territories where access to financial systems and even the internet is limited. Thanks to CBDCs, access to affordable, high-performing and efficient financial services will increase, improving people’s quality of life.
For citizens, transactions will be similar to those they already do with the bank applications currently in use. CBDC transactions could potentially be carried out both online and offline. For the offline mode, that is to say, if there is no internet connection, users will be able to make payments by connecting their CBDC account to a SIM card equipped with NFC technology. In practice, it works the same way as pre-reserving a certain amount of funds in your account, just as you now take cash with you when traveling to places where payment cards may not be accepted.
The animation below illustrates how a hybrid CBDC payment system will work in practice.
Note: The high-level architecture of the CBDC platform demonstrated in the animation below is indicative of the kind of architectural construct preferred by most central banks around the world.
CBDCs, in addition to the actors mentioned above, include a new one — a CBDC platform where commercial banks have accounts.
Buying e-ticket with digital currency
Swap digital currency
Deposit digital currency
Everscale tech stack
There are two unique technical solutions embedded in the Everscale blockchain core protocol that make it suitable for hosting CBDCs — even for counties with populations over 100 mln people. These are Horizontal Scalability and Programmable Accounts.
The key to the trouble-free operation of a CBDC platform is scalability. This is due to a large number of transactions being initiated each second, especially in countries with large populations. Currently, there are few blockchain platforms that are capable of handling such a high workload. The Everscale blockchain is one of them due to horizontal scalability which is achieved via the network’s unique sharding design. Generally speaking, sharding involves the splitting and distributing of one data set between multiple nodes (servers). In the case of a CBDC, sharding allows splitting large transaction sets into distinct pieces that can be processed in parallel.
Two unique characteristics of Eversale’s sharding mechanism:
First has to do with the fact that the number of shards is not fixed. There is an automatic splitting of shards in two when the workload (number of transactions) significantly increases. For instance, imagine a high-impact event occurs (such as the COVID crisis) which triggers a larger number of transactions due to buying sprees. In this case, shard splitting can continue up to 256 shards, which, in practice, means that an almost infinite number of transactions per second can instantly be processed without the creation of bottlenecks and waiting times. The splitting of a shard starts when certain predetermined conditions are met. There are three: the maximum number of transactions in a block (It), the volume of gas consumed by transactions and the block’s byte size. When a block fulfilling one of the conditions is created the system will react with a want split flag. If a consecutive sequence of 100 such blocks follows, the split event will be triggered.
The animation below illustrates the operation of shard splitting in action.
Second has to do with elasticity. As noted above, the workload, especially in the case of a payment system, is not constant. When it slows down, the shards merge back together. This is the most efficient way to deal with dynamic scaling requirements which, by default, are impossible to predict in advance. There are periods of time when the number of transactions per second (TPS) significantly reduces (such as night time).
Horizontal scalability and CBDC features:
- Faster payments. In the Everscale blockchain transactions are processed in an instant irrespective of both the number of transactions per unit of time and the location they are initiated from. More than that, there are solutions that could possibly enable payments even without a connection to the Internet.
- Cheaper cross-border transactions. International transactions are very expensive. For instance, with Western Union (the top money transfer service) commissions can reach 10% of the amount transferred. A CBDC on the Everscale blockchain can disrupt this market by making cross-border transactions almost free — with an average price of a few cents per transaction.
- 24/7 access at the same speed. Existing banking services often take longer on weekends as banks are closed and cannot confirm transactions. With an Everscale central bank digital currency, transactions can take place at the same speed around the clock due to the fact that the processing infrastructure is always on.
The Everscale blockchain has Account Abstraction (AA) functionality embedded into its core protocol. It means that each wallet (CBDC account) of a user (citizen) is a smart contract and therefore can be programmed to perform any logic. For instance, parents can prohibit purchases of cigarettes or alcohol from their children’s accounts. Likewise, a government that launches its CBDC with Everscale can programmatically prohibit sales of cigarettes and alcohol by shops in close proximity to kindergartens and schools.
Similar to traditional accounts, in most cases, a CBDC account will also be opened by commercial banks. Therefore, it will be responsible for programming such accounts at the request of customers.
CBDC accounts on the Everscale blockchain: Common features
- More efficient government payments. Governments with an Everscale blockchain-based CBDC will be able to instantly send any payments to their people. These can be tax refunds, unemployment and child benefits or even one-time payments such as those distributed by most countries during the COVID crisis. Recall the mess around COVID payments when a big chunk of government bureaucracy had to be involved to figure out a mechanism for different groups of people to be able to receive the payments they were entitled to. With an Eversclale CBDC, such payments can be programmed into the smart contract which, in an instant, will distribute the payments to those citizens that the government promised to pay.
- Support for the unbanked population. There are a few countries in the world where 100% of the population has access to banking services. In some countries up to a third of the population consists of unbanked people. As a result, citizens of countries with poor financial infrastructures have to pay expensive fees for different banking services. With CBDCs, the unbanked population will be able to have full control over their money and benefit from financial services without having to pay excessive fees charged by the many intermediaries.
- Fighting corruption. Thanks to blockchain transparency and account programmability, an Everscale-based CBDC will be a significant step in the fight against corruption. For instance, an account of a municipality can be programmed to be able to spend funds only for certain predetermined purposes. That is to say, if the respective municipality receives some funds from the central government to build a school, an account can be programmed to spend the funds only for building materials and whatever else is needed to build the school. All other payments from that account can be prohibited.
- Payment scheduling. With traditional forms of money, you must manually make a payment each time it is due. These are, for instance, utility bills, rent payments, subscriptions and many other regularly made payments. With an Everscale CBDC account, it is possible to set up automatic payments, ensuring the electricity bill is paid on time, the landlord receives the rent on time or a subscription never lapses. This will revolutionize subscription-based services, providing a seamless payment experience for all.
- Multi-signature CBDC account. This allows multiple trusted parties to control a single account, providing additional security and control. This is particularly useful for organizations or families, where decisions must be made collectively. For instance, a family could possibly want a big ticket purchase to be approved by all its members. An Everscale CBDC account could be programmed to require the signature (approval) of all those enlisted. Practically, when such a purchase is initiated, each family member will receive a notification on his mobile application and will be able to either approve or reject it.
- Quantum computing. There is a lot of discussion about the advent of quantum computers capable of compromising blockchains. In Everscale, smart contracts can enable CBDC accounts to align with changing quantum requirements because they are upgradeable. Due to this, there will be the possibility to design and deploy secure and quantum-resistant signature algorithms.
ANY OTHER LOGIC CAN BE IMPLEMENTED IN AN EVERSCALE BLOCKCHAIN-BASED CBDC ACCOUNT. THE POTENTIAL IS LIMITLESS!