Zero-knowledge or Optimistic Rollups for CBDCs — Why not?

DLT is not Blockchain, right?

Blockchain and Distributed Ledger Technology (DLT) are often used interchangeably, but they are not exactly the same thing.

DLT is a decentralized database managed by multiple participants, across multiple nodes. The key characteristic of DLT is that it lacks a central authority or administrator.

Blockchain is a type of DLT, a subcategory if you will, where data is stored in blocks and all blocks are linked to each other forming a chain. Hence the name, blockchain.

So, to put it simply, all blockchains are DLTs, but not all DLTs are blockchains.

Here’s an analogy to help you understand better: consider DLT as a genre of music, like rock. Blockchain would then be a subgenre of rock, like punk rock. All punk rock songs are rock songs, but not all rock songs are punk rock.

The consensus mechanisms play a crucial role in maintaining the integrity and security of distributed ledger technologies like blockchain. Here are a few common consensus mechanisms:

1. Proof of Work (PoW): This is used by Bitcoin and Hathor for example, and involves solving complex mathematical problems. The first participant to solve the problem gets to add a new block to the blockchain. However, this method requires a lot of computational power and energy.
2. Proof of Stake (PoS): This method is more energy-efficient than PoW. In PoS, the creator of the new block is chosen based on their stake or ownership of tokens in the network.
3. Delegated Proof of Stake (DPoS): In this system, token holders vote for a few delegates who are then responsible for validating transactions and maintaining the blockchain. It’s faster than PoW and PoS, but it can lead to centralization.
4. Proof of Authority (PoA): This is a modified form of PoS where instead of stake, identity is at risk. Validators are chosen based on their identity and reputation.
5. Byzantine Fault Tolerance (BFT): This is a method used to achieve consensus even if some nodes fail or act maliciously. There are several versions of BFT, including Practical BFT (PBFT) and Federated Byzantine Agreement (FBA).
6. Directed Acyclic Graphs (DAGs): This isn’t a consensus mechanism in itself, but a data structure that some DLTs like IOTA use instead of a blockchain. In a DAG, several transactions can be confirmed simultaneously, making it highly scalable.

Each consensus mechanism has its own pros and cons and is suitable for different use cases. The choice depends on the specific requirements of speed, security, decentralization, and energy efficiency.

Other forms of DLTs that are not blockchains include systems like IOTA’s Tangle or the Ripple protocol. These systems also distribute data across a network, but they do it in a way that is different from blockchain.

While the term “blockchain” is often associated with public networks like Bitcoin, Ethereum or Hathor, it’s important to understand that not all blockchains are public. There are also private blockchains, which are only accessible to a selected group of participants.

Rollups for CBDCs

Let’s dive into how Zero-Knowledge Rollups (ZK Rollups) could be used for Central Bank Digital Currencies (CBDCs) on public blockchains, instead of relying on private blockchains and traditional Distributed Ledger Technologies (DLTs).

ZK Rollups are a Layer 2 scaling solution that uses zero-knowledge proofs to bundle many transactions into a single one, thereby increasing the number of transactions that can be processed per second. This technology can significantly increase the scalability of public blockchains, making them a viable platform for CBDCs.

For instance, instead of using a private blockchain or DLT, a central bank could issue its CBDC on a public blockchain like Ethereum, leveraging ZK Rollups for scalability. This would allow the bank to benefit from the security and decentralization of the public blockchain while maintaining transaction privacy and processing a high volume of transactions.

While ZK Rollups are still relatively new and complex, they represent a promising technology for implementing CBDCs on public blockchains. Further research and development are necessary to fully realize their potential. The use of ZK Rollups for CBDCs is an active area of exploration in the blockchain community.

Optimistic Rollups, on the other hand, could be more suitable for a CBDC system implemented on a private blockchain. For example, a central bank of a small country might decide to issue its CBDC on a private Ethereum network to maintain full control and limit access to authorized participants only. In this case, Optimistic Rollups could be used to increase transaction throughput. The fraud-proofs mechanism would assume all transactions are valid unless proven otherwise, allowing for higher scalability.

Can ZK Rollups solve interoperability issues between CBDCs for banks?

ZK Rollups can significantly improve the scalability and privacy of transactions on a blockchain network. However, they do not inherently address the issue of interoperability between different CBDCs or between CBDCs and other digital assets.

Interoperability in the context of CBDCs is a complex issue that involves not only technical considerations, but also policy and regulatory aspects.

Solutions for interoperability could involve the use of cross-chain protocols, bridges, or other forms of inter-ledger communication.

Nevertheless, ZK Rollups could be part of such a solution by ensuring that transactions across different networks can be processed efficiently and privately.

Both ZK Rollups and Optimistic Rollups provide solutions for scalability issues on blockchains and can be used in different scenarios depending on the specific requirements and constraints of the CBDC system being implemented. Whether the blockchain is public or private will depend on the central bank’s policy regarding transparency, control, and privacy.