CBDC Race Has Started: What Should we Expect from It?

CBDC is a new milestone in the development of digital assets, which gives more transparency and access to banking products to the population that does not have access to them but also brings more government control over people's lives.

Current problems of the traditional financial system vs. CBDC

The race of CBDC (Central Bank’s Digital Currency) that began a few years ago with the announcement of China's launch of the digital yuan has radically changed the impact on the crypto industry and its attitude towards it. Governments are reaching for a pie that can eliminate their problems and those of their consumers. And, of course, banks are not against joining this race as well so as not to lose their leadership.

So what are the problems facing banks now?

1. The complexity of cross-border transfers.
2. Difficulty in transfers storing data (possibility of changing data internally)
3. Lack of transparency between structures.

All these problems, with the huge leverage of unsecured funds and the possibility of imposing sanctions against each other, undermine the confidence of players in the traditional market.

With CBDC integration Central Bank got an opportunity to radical improvement of monetary system efficiency:

• Better security and a safer banking system
• No vendor lock from foreign IPS
• Easier access for unbanked people
• Less bureaucracy
• Improved liquidity of assets

Bitcoin emerging from the environment of mistrust towards each other opens an excellent way to solve this problem. There is a point of growth of cryptocurrency in a singular growth - distrust.

Below I explain what is happening in the new CBDC sector.

CBDC Acceptance Map

Just think for the last 2 years, interest in CBDCs has increased by 200%.

The current map clearly shows the increased interest on the part of states in national independent digital in a multipolar world.

There are currently 5 digital assets in the active launch stage:

• Central Bank of the Bahamas (Sand dollar)
• Eastern Carribian (DCash)
• South Africa (Khokha)
• Nigeria (ENaira)
• China (E-CNY)

* It is important to note here that most of CBDCs are not decentralized like Bitcoin or other cryptocurrencies.

The rest of the countries are still in the stage of research and test pilots, which, however, does not prevent them from obtaining the necessary data from other states to implement their own CBDC.

CBDC Paradox

Conflict interest between the end-user and the goverment

The main problem with the “CBDC Paradox” is that some users want more anonymity, others want to own their money (your money is your key), and a third wants nothing to do with the money that was used by fraudsters/terrorists, etc.

And the other side, represented by the state, wants to establish its own rules for conducting transactions and control the user. The solution should be simple and capable of solving this.

As we can see, most blockchains, even Ethereum, do not solve this problem. I have identified three that, in my opinion, are suitable for solving this problem.

CBDC Blockchains. What blockchains are best suited for digital assets?

Note: I chose these blockchains for consideration because, in terms of technical characteristics, they are most suitable for scaling and creating state networks.

Everscale

Why Everscale? So let’s start from here. Each wallet in Everscale is a smart contract, which is why we’ve fully solved the CBDC paradox resulting in the ability to handle a large number of transactions. Everscale also can also have flexible policies for different government, business, and social services. That is why the blockchain was built with the capacity to handle a large number of TPS.

Everscale has two interesting concepts - endless sharding and storage fees.

Most current blockchains have a problem with growing the blockchain size state. That is, blockchains that want to last more than 10-20 years are forced to limit the pace of writing to the size state so that the size of the blockchain does not grow too quickly. After all, validators are obliged to store this entire state forever, and the size of the state also slightly slows down the speed of processing transactions (it is necessary to update the Merkle tree proof of the state), albeit by log (N is the number of contracts on the network).

Therefore, in "normal" blockchains that care about their future, for example, on Ethereum, users are forced to compete with each other for the right to record data to the blockchain state size at an auction because Ethereum understands that it is impossible to write data to their blockchain state size faster than the storage of this data becomes cheaper. Otherwise, it will not be profitable for validators to store them in the future. Blockchains that do not care about their future, for example, polygon or BSC with weak decentralization, or do not care what will happen there in 10 years, limit the recording rate much less because users are important to them now, and they will think about the future later.

In Everscale, there is a complex but unique concept of storage fees - when each contract pays for its storage on the network. Therefore it makes no sense to limit the pace of recording to the network because the contract pays for its storage for a while, and then will be deleted. Therefore, we can provide the recording to the network at a certain price, and users should not compete with each other for the right to record.

The second part is infinite sharding. Due to the fact that shards are added dynamically, we can process a potentially huge number of transactions per second, but of course, it is not free, and they will be slower to complete. That is, with the addition of a large number of shards, the time to execute transactions increases, but the number of transactions per second is very large. This part is still in the process of being finalized; we need normal interaction between the workshops, I hope this will be implemented adequately.

As a result of connecting both of these concepts, we get a system that can process a huge number of transactions per second for a constant price (albeit with a slowdown in load peaks, but this slowdown concerns the execution time of one transaction and not throughput), and at the same time remain efficient for decades while, unlike rollups, remain decentralized.

Also, a key feature of the project is Invisible Bridge, which fully fits into the concept of CBCD. Invisible Bridge allows users to transfer funds directly from one EVM blockchain to another in a single interface. While the networks are being linked via the Everscale network, the cross-chain liquidity flow takes place under the hood, so at the user’s end, it is a direct transfer from one network to the other. Normally, doing this would require the user to go through a complicated process where they would have to pay for gas at every stage. With the Invisible Bridge, gas fees, which are extremely low, are only paid once and can be paid in the currency of the EVM network of choice.

Near Protocol

The Near protocol fits the concept of CBDC because, like Everscale, it uses a delegated Proof-of-Stake (PoS) blockchain with support for smart contracts and sharding for maximum efficiency.

Near also interacts with Ethereum via the Rainbow Bridge, a secure bridge that allows assets such as ERC20 and NFT tokens to be transferred between Ethereum and NEAR. Eventually, it is even possible to interact with smart contracts and DApps on both sides using the Rainbow Bridge.

In terms of architecture, it uses a sharding mechanism called Nightshade. Instead of creating multiple edge parachains like the Polkadot blockchain, the Near chains are modeled as a single blockchain. Simply put, each block created on Near contains snapshots of transactions occurring on each segment of the other chain.

Polygon

Polygon it is a network of secure Layer 2 (L2) solutions and autonomous sidechains. Its goal is to increase the scalability of the Ethereum blockchain and reduce transaction costs.

Polygon supports two main types of Ethereum-compatible blockchains: autonomous networks and secure networks ("secured chains" - which use the "security as a service" model).

Autonomous networks rely on their own security; for example, they may have their own consensus models, such as Proof-Of-Stake or Delegated-Proof-Of-Stake. These networks are completely self-contained, providing them with the highest level of independence and flexibility, but creating a reliable security model is difficult. For example, POS requires a large number of trusted validators. This kind of model is usually suitable for enterprise blockchains and established projects with solid communities.

Secure networks use a “security as a service” model. This can be provided directly on the Ethereum network or by a pool of professional validators. These validators run nodes in the Polygon ecosystem and can be shared across multiple projects – a concept similar to Polkadot’s shared security model. Secure chains provide the highest level of security but, at the same time, sacrifice independence and flexibility; this model is usually preferred by startups and projects focused on security.

As you can see, this blockchain also fits the concept of solving the CBDC paradox, like Everscale and Near Protocol.

What does the winner get?

Blockchains occupying this niche will get massive access to the liquidity market - pools for international trade and remittance in stablecoins and CBDC states. For example, India - Emirates. Millions of people from India are working in the Emirates at the same time, and a lot of goods trade from India to the Emirates. This is an actual non-speculative pool for financial flows. If your base currency is the dollar, you diversify your portfolio of currencies and, at the same time, earn money instead of banks on accurate international trade turnover and remittance flows.

Conclusion. Where it leads?

Now, when major geopolitical events are taking place in the world, we can observe regular changes from centralization to decentralization. Why is this happening? The answer is simple - distrust. This is the environment where Bitcoin was born when one party could not trust the other (see Byzantine Generals Challenge). Thanks to this factor, the growth in cryptocurrency adoption will be one of the loudest and most powerful than the same dot-com boom. Also, companies that now provide services for implementing CBDC at the exit will become nothing more than a unicorn. CBDC will be the driving force that will determine the future of the blockchain and the entire industry as a whole.

Of course, here we can expect the risks of a recurrence of hyperinflation (Hi Weimar republic!)

Blockchain is not a panacea for all problems, but it will give the impetus that is needed for its adoption.

We live in a great time!