Novel Solutions for Inclusive Digital Currenciesby@dragonchain
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Novel Solutions for Inclusive Digital Currencies

by DragonchainSeptember 4th, 2021
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Nations across the globe are piloting CBDCs and companies, including Hyperledger, IBM, Stellar, and Ripple all want to lead the way in implementation. Meanwhile, advocates for centralized digital currencies are not welcomed by proponents of decentralization who are debating the necessity of it all. Digital currencies will happen. The question is, “Will we be able to find a common solution?” An interoperable, scalable, quantum encrypted system that protects sensitive information and leverages public blockchains to prove data integrity and accountability is the answer. Some say it’s not possible when in fact it is possible and it’s actually operational today.

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A Workable and Scalable Model for CBDCs in the Real-World

Discussions surrounding central bank digital currencies (CBDCs) are slowly gaining traction.

Eighty-one countries are currently exploring the use of CBDCs [1], and the Monetary Authority of Singapore recently announced a Global CBDC challenge. [2,2a]

As nations test the feasibility of a digital currency, we once again find ourselves in a binary battle. Proponents for a centralized digital currency and proponents for a decentralized digital currency are hashing it out over the future of monetary systems.

No doubt about it; there will be a digital currency but who ultimately wins remains to be seen.

The Case for Centralization

Governments, monetary authorities, and central banks have watched as the popularity of cryptocurrencies has increased over the past decade.

Growing concerned, they generally see Bitcoin and other cryptocurrencies as a threat to traditional banking and monetary systems. From their perspective, the speculative nature of cryptocurrencies has led to concerns about inflated valuations and risks of scams, hacks, and, perhaps more importantly, a pure lack of control.

However, central banks and monetary authorities recognize the digital world we live in and the need for a better way to settle payments and exchange money. Using a CBDC, a central bank can quickly roll out a completely digital transition of its monetary system that offers increased financial inclusion and greater access for the unbanked.

More importantly, for authorities, CBDCs offer more transparency into the activities of illicit behaviors and corruption of private businesses, including tax evasion. However, not everyone agrees with using a central bank’s digital currency.

The Case for Decentralization

On the other end of the spectrum are proponents of decentralized currencies. Backed by a public blockchain and controlled by no one, decentralized currencies provide for a trustless monetary system. Elevating individual rights and responsibilities, decentralization relies on users deciding when and how to spend their money.

Beyond individual rights, decentralized currencies serve as a solution to failing monetary systems plagued by hyperinflation. They also offer transparency into money flows to track and trace corruption and misuse of funds.

Additionally, the global nature of commerce will benefit from decentralized currencies as goods and services will not be affected by unfavorable changes in a nation’s monetary values.

Antithetical to the philosophies of trustless systems, proponents of decentralized currencies believe CBDCs grant near-complete control to central banks, providing avenues for a tyrannical government to use information against individual liberties.

Ultimately, many believe the growing divide between the haves and have nots is being fueled by a lack of transparency and corruption. But, the simple truth that proponents of full decentralization fail to understand is that nations (and businesses, for that matter) have reasons for keeping sensitive data private. Every nation has its own sovereignty it is entitled to maintain and, as such, should be afforded the ability to do so.

In the end, we see that one side wants full control, and the other side wants full decentralization. Ultimately, however, both are unrealistic.

We need a realistic approach.

There are aspects to both sides that are very valuable. But some parts are an affront to freedom and liberty. What if we used a hybrid public/private digital currency? The use of an interoperable hybrid system that protects sensitive information and leverages public blockchains to prove data integrity and accountability is the answer. Let’s see how.

A Hybrid Public/Private Digital Currency

A hybrid public/private digital currency would allow for private and proprietary data supported by centralized entities and ensure a trustless system with decentralized proof for data integrity that is important to decentralization advocates.

The hybrid system would track and trace illicit behaviors and corruption as supported by centralized and decentralized advocates. It would also open avenues for the unbanked and, with some hybrid systems, could provide ways to use digital currency even in cases of no Internet access.

A hybrid digital currency could support multiple layers of decentralization by using multiple payment blockchains nodes synchronized to a single issuance blockchain. Let’s discuss some key ways the hybrid digital currency can bring both sides together towards this common goal.

Digital Currency Solution with Controlled Transparency

A hybrid system could provide controlled transparency and could allow for the selective release of data. By separating the data, the metadata and any tagging or actions necessary for the minting, management, distribution, or flagging of currency transfers or use could be selectively exposed to regulators, banks, or managers with complete proof of action, integrity, and timing. [3]

Using decentralized identity with full KYC and AML capabilities, a hybrid public/private digital currency would have visibility into all currency movements and could even control the level of public transparency for most or all transactions on the system. This gives enormous power to prevent unauthorized uses and illicit transactions on the system.

Selectively Backed Currency

When considering the transition to digital currency, a nation must consider the backing. China is piloting its digital currency pegged to the Yuan. For every digital Yuan created, a paper Yuan is removed from circulation. The Yuan itself is backed by gold, as is the case with Russia, whose digital Ruble is also backed by gold. The US has discussed creating a digital currency but has not yet instituted even a pilot program.

Many smaller countries could see a transition to digital currencies as a way to increase wealth. A transition to a hybrid system could be met with a digital currency backed by the country’s natural resources such as oil or some commodity such as coffee or Bitcoin. Countries could even create a digital currency backed by a public cryptocurrency or a combination of cryptocurrencies or commodities to significantly increase the country’s wealth.

Once established, the hybrid digital currency should allow for true proof of reserves reporting to maintain value. This model should also allow flexibility in adjusting or modifying the backing components and algorithms or equations in mapping the backing of the digital currency token as the need arises.

Automated Advanced Governance

A hybrid system should allow for the control of supply and governance. Governance features such as token smart contracts, processing versioning, and time-based supply change updates should be investigated. An advanced governance model for managing the currency itself and components of the system infrastructure (e.g., trusted identity authorities, bank enrollment, user registration, vendor access, etc.) could be possible.

Monetary Inclusion for Every Citizen

A hybrid system should be usable by both technical and non-technical users alike. The system should include a user interface that is “grandma safe” and easier to use than most non-blockchain applications.

Instead of using a typical cryptocurrency wallet, a hybrid public/private digital currency with a decentralized digital identity [4] could map tokens or currencies to a user ID. This would allow “account” based pools for a user to organize their holdings without the risk of storing multiple keys or losing a device. Associating accounts to an ID could simplify the entire system allowing for friendly and natural user interfaces for even non-technical users.

Is digital currency possible without the Internet?

A hybrid public/private digital currency should allow for interchange or purchases without Internet connectivity, even in the absence of a smartphone or smart device. Such a system was designed at Disney for use in its theme parks. [5] Decentralized identity in combination with EMV/chip cards (or even low-tech ID cards) could be used instead of a smart device. This ability is necessary for economies with low levels of digital adoption.

If the user is without connectivity but the vendor is connected, the hybrid system should provide the ability to accept payments between smart devices or between a smart device and a user payment card.

Also, if there is a dispute with offline payments, the system should be configured to allow for a limited amount of offline payments by the user based on the latest balance(s).

Finally, the system should include the ability for existing chargebacks in the event of fraud by the user.

Sustainability and Energy Efficiency

A hybrid public/private digital currency would be sustainable, efficient, and carbon neutral. The energy required to verify transactions should be as low as possible. Each system should be deployed to carbon-neutral facilities. It is estimated the energy consumption of Bitcoin is lower than that of the worldwide banking system. The proof-of-work currency consumes an estimated 114TWh a year, while the banking system is estimated at 260 TWh. [6]

Using a proof-of-stake currency such as Ethereum would reduce energy consumption upwards of 99%. [7] Further reduction in energy usage can be seen with level two scaling chains. [8] A hybrid public/private digital currency is the most efficient and responsible way to lead the population towards a more sustainable future.

Hybrid Interoperable Architecture for Privacy and Security

A hybrid public/private digital currency system combines permissioned blockchains for privacy controls and the use of permissionless blockchains for their security and traceability.

Embedded Privacy to Reduced Risk of Data Exposure

A hybrid system, where only specific information is shared with selected authorities or other users, could mitigate risks of unintended data exposures and personal protected information breaches.[9]

All personal and private information of the user could be protected by breaking down identity components into atomic identity elements. [10] Selected elements could be shared at will by the user to businesses or other users. This information could also be shared with authorities in cases of specific operations or payments, with no risk of public exposure. [11]

If certain operations are flagged for potential fraud or improper use, more extensive identity information could be required by the payment network to complete the transaction. The user could release additional information to specific entities as needed.

Finally, a hybrid system should be capable of compliance with GDPR, CCPA, or any other privacy regulation and should also allow the system to prove compliance with those regulations. [12]

Quantum Encryption and Advanced Security Features

The hybrid system should include several advanced security features, including multiple levels of network consensus, to prevent common blockchain-specific attacks. A complete hybrid public/private digital system would include additional KYC, AML, and anti-fraud system components to mitigate the risks associated with identity theft.

Every user or payer could have a decentralized digital identity, including multiple cryptographic signing keys tied to their identity. The known identity and signed proof of prior balance, either on a local chain or the user's device, can prevent anyone from being wrongly identified as the user.

In an environment where quantum computing is making advancements quickly, the platform should be equipped with the protections needed to secure the entire system now and well into the future. The hybrid system should include quantum encryption and signing capabilities. [13]

Flexible, Scalable, and Interoperable Integrations

Interoperable with any Digital Currency or Sovereign Financial System

The key to a hybrid public/private digital currency system is its ability to be used across platforms and borders. Interoperability with traditional systems must be possible to allow novel systems to efficiently integrate with the hybrid public/private digital currency system. [14] For minimal disruption, the system should follow already in-use payment rails, including the use of existing payment cards.

National or regional identity systems should be integrated into a decentralized digital identity system, mapping the system to the existing identities of citizens.

A nation should use the blockchain platform of its choice. Platforms such as Ethereum, Hyperledger, IBM, R3 Corda, Stellar, and Ripple are only a few companies leading the way in framing future digital currency systems. Ethereum, Stellar, and Ripple have extensive experience in the movement of money across public blockchains.

Hyperledger, IBM, and R3 Corda use private blockchains. Other blockchain platforms, such as Chainlink for its oracle function or Polkadot for its smart contract capabilities, may be required to provide additional utility to these complex systems. As the number of pilots grows, so will the need for interoperability, regardless of the systems used or the monetary authority using them. [15]

An interoperable system shouldn’t require different nations to conform to a set of standards. A nation’s sovereignty should be maintained with the development and integration of a hybrid public/private digital currency. [16]

An ultimate level two scaling solution will be required to support interoperability, maintain sovereignty, and, perhaps more importantly, be able to tap into any blockchain platform for additional utility (inclusion of security tokens as an example) without added infrastructures and disruptions to the entire digital currency system.

Frictionless and Flexible Digital Currency Systems

A hybrid system should be flexible and allow for system deployment to a variety of already in-use infrastructures.

Platforms participating in research and pilot programs for CBDCs typically use Ethereum based permissioned blockchains that require specialized code language such as Solidity. [17] The hybrid system should be flexible enough for any engineering team to successfully code smart contracts in the programming language of choice. [18]

This level of flexibility is highly effective in lowering development costs and security risks, as an organization’s existing engineering resources can re-use code or integrate existing IT services into the business logic. [19]

The hybrid system should embed workflows in a very flexible manner, including the ability to add or remove unanticipated requirements as needed without altering the user’s experience. [20]

Robust Scalability for a Completely Digital Future

The hybrid system should be independently scalable. [21] Other systems on the network should not affect the hybrid public/private digital currency system. [22]

Independently scaling the system will ensure that network fees and speeds remain stable. Overall network speeds should rival that of already in-use payment rails. [] As the needs or requirements of any digital currency system change, adjustments should be made with minimal disruption to the entire system.

In the end, it’s about balance.

There is no doubt that digital currencies will become part of the monetary system. To what extent their inclusion and effect will have on the current economy of nation-states remains to be seen.

Ultimately, both centralized and decentralized advocates see the positive outcomes possible with the ability to monitor, record, and analyze money flows. They differ in who they want to monitor.

A trustless system that protects private and proprietary data offers proof of data integrity, respects the individual’s rights, and the sovereignty of nations will prove to be the system needed. The question is can both sides come together to build a new monetary system built on these ideals?

1 CBDC - Central Bank Digital Currency Tracker

2 MAS Announces 15 finalists for the Global CBDC Challenge

2a Authority of Singapore Global CBDC Challenge 3 Dragonchain Architecture segregated data. Private and proprietary data remains at the business blockchain level and the proof of the event is then sent for decentralized verification and secured to multiple blockchains. 4 Dragonchain separates individual identity components to include physical characteristics. A confirmed identity factor could be linked to a wallet where one of the factors would be the account number. Self Sovereign Identity & Decentralized Identity - Control Your Data 5 Capabilities were designed by Dragonchain at Disney with capabilities to continue operational function in the parks in the event that a user is without Internet access. 6 Banking system consumes two times more energy than Bitcoin: Research 7 Ethereum founder Vitalik Buterin says long-awaited shift to ‘proof-of-stake’ could solve environmental woes 8 At current transaction volume, every transaction verified on Dragon Net consumes approximately (0.02 W) of energy. Dragonchain Network Energy Efficiency and Sustainability Report 9 10 5 Things You Should Know About Factor 11 Proven functionality with COVID SafePass. All data in the HIPAA compliant app is stored with the user who can selectively share that information with authorities. Central Florida tech firm launches coronavirus monitoring app - Orlando 12 Dragonchain architecture allows businesses to be GDPR capable as it segregates data allowing sensitive information to remain private and sending proof of the event for verification. Blockchain-Based Proof of GDPR Compliance 13 Through a partnership with AQED, Dragonchain provides quantum-safe encryption and signing capabilities, using patented quantum encryption technology. Quantum Safe Blockchain In a Digital Fortress 14 Through a RESTful API approach Dragonchain established operational interoperability in 2014. Interchain™ Between Blockchains and Traditional Systems 15 16 Interchain can interop any traditional system without the need for a set of blockchain-based standards maintaining a businesses proprietary data. Remain Sovereign with Blockchain Interoperability 17 Blockchain Solutions for Central Bank Digital Currency (CBDC) 18 Dragonchain’s patented smart contract orchestration is written in any language to streamline any workflow process. Flexible and Scalable Smart Contracts Powered by Dragonchain 19 Dragonchain allows for any executable code to be used with any system. The platform uses already in use systems for any solution. Blockchain Technology Fundamentals 20 By using...state variables that trigger execution in a blockchain or similar controlled environment…cascading processes can be incrementally and reversibly automated without any necessity for coordination and without compromising security. Flexible and Scalable Smart Contracts Powered by Dragonchain 21 Dragonchain platform is independently scalable and allows for every business chain to independently scale as well. Dragonchain Receives Patent for Blockchain Scaling and Loyalty System

22 Dragonchain’s independently scalable platform is not affected by any other network using the platform. The Case of the Crippling CryptoKitties - Why Scalability is the Most Important Attribute 23 In a scaling event in January 2020, Dragonchain demonstrated that it can scale beyond the volume of the worldwide Visa payments platform for an extended period of time. The demonstrations executed over 260 million transactions in a 24 hour period on the operational network. During that time, every transaction was fully verified by thousands of interoperable blockchains on the network, as well as the Bitcoin and Ethereum blockchain networks. Even though this was a 6 orders of magnitude increase in traffic, no other blockchain on the Dragonchain network saw any congestion or increase in fees.