Plasma Could Enable CBDCs, Says Ethereum’s Buterin – But Scalability Isn’t The Only Hurdle

Vitalik Buterin believes Ethereum’s upcoming plasma implementation could make ERC20 central bank digital currencies viable. We’ll discuss which governments have considered these sovereign tokens and whether Plasma could, in fact, make Ethereum a good fit.

In a recent Twitter poll by bitcoin investor Olivier Janssens, Vitalik Buterin voiced his support for an ERC20 central bank-issued digital currency (CBDC). When questioned about scalability, Buterin responded that the impending plasma implementation will address this concern and the Ethereum network will be sufficiently scaled for use by national banks. 

Plasma MVP

Plasma is one of Ethereum’s upcoming potential solutions to its scalability problem. However, the version of Plasma Buterin is referring to, Plasma MVP, is one specific iteration of the concept, not the end-all-be-all of Plasma solutions. At the Ethereum Community Conference in March, developer at the Ethereum Foundation Karl Floersch explained, “Plasma is not a protocol, it is a design pattern, a technique.”

Announced in January, Plasma MVP, or “minimum viable plasma,” is an open-source contract that is essentially Plasma’s rough draft. However, because Ethereum contracts are incredibly complex, developers seem to be exercising some caution – examining the code for bugs before rolling it out on the mainnet. Meanwhile, developers are improving the existing code and testing their own Plasma implementations.

Floersch, who also worked as a blockchain engineer at ConsenSys, gave a great explanation of MVP on YouTube back in March. In it, he explained how the contract will create a “child chain,” that enables incredibly fast transaction times – 1000 transactions per second for every child chain (current transactions per second are estimated between 13 and 20).

The tokens available on the child chain are ERC20 tokens, called PETH, which are always exchangeable for ETH. To enter a child chain and make transactions there, a plasma contract is used to exchange ETH for PETH. This original transaction is completed by the contract on the main chain, and it is immediately recorded both on the main chain and on the child chain.

The plasma chains with MVP are proof of authority (PoA) chains, wherein a single “plasma operator,” is responsible for approving all subsequent transactions. While this is significantly more centralized than the Ethereum’s main chain, developers were careful to delegate complex checks and balances to protect users and offer rewards to parties who can prove the bad behavior of others. 

What Governments Want Out of a CBDC

Several governments are considering a CBDC, some have vetoed the idea, and a couple more have already approved or implemented one.

After months of discussion, the People’s Bank of China (PBoC) announced in March it is developing a digital currency known as DCEP, or the Digital Currency for Electronic Payment. China hopes to achieve less costly, more convenient modes of payment, but the bank has also stated the importance of centralized control of the tokens and cautioned against EDCCs (aka smart contracts).

Norway’s central bank, Norges, recently extended its study on CBDC implementation as a supplement to cash. In a working paper, the bank stated the need for a stable, trusted form of currency. If Norway were to implement a CBDC, it “must be denominated in the Norwegian krone and have the same value as other means of payment denominated in the Norwegian krone.”

India, Switzerland, England, Iran, and the Eastern Caribbean are also looking into CBDCs. What each country wants varies to some degree. For example, the Eastern Caribbean islands, which currently use the US dollar, see the notion as a way to have their own sovereign currency. However, some in nations like Norway and England envision crypto equivalents of their existing currencies, or a cryptocurrency specifically used for international transactions between banks.

In February, the Marshall Islands’ legislature gave its approval for a national cryptocurrency, the SOV, to be treated as legal tender. The SOV is set apart by its Yokwe framework, which employs an identification protocol meant to be a departure from the anonymity associated with many cryptocurrencies. However, the coin has yet to be launched, and it is unclear what platform it will use.

Venezuela has the Petro, an ERC20 token that is supposedly oil-backed, but due to the immense instability of the country’s economy and government, as well as related corruption, the Petro probably is not a great case study.

Not everyone thinks a CBDC is such a good idea.

On May 15, 2018, Federal Reserve Governor Lael Brainard spoke at the Decoding Digital Currency Conference in San Francisco. She said that state-backed digital currencies were a bad idea because of the irreversibility of cryptocurrency transactions, the volatility in crypto value, and issues with identity verification for KYC and AML requirements.

On June 7, Russian president Vladimir Putin stated in his annual question-and-answer session with the Russian citizenry that “Russia cannot have its own cryptocurrency inherently, just like no other [country] can have its cryptocurrency.” He explained that the technology cannot be contained by national borders.” It is noteworthy, however, that Russia has gone back and forth on this topic.

On June 19, the Bank of Korea said it opposes the idea of a CBDC on the grounds that it would destabilize the market and would present challenges for legal management.

Is Plasma Enough to Scale? Is Scalability the Primary Concern?

Visa is capable of processing 24,000 transactions per second. Each Plasma chain only has the capacity to process 1000 transactions per second, but there could be multiple child chains. It is unclear how many plasma MVP contracts will be able to run simultaneously on Ethereum, or if there is any limit.

Plasma MVP will dramatically improve transaction speed, which could allow a country to operate a CBDC on Ethereum, especially if it was confined to interbank activity rather than for use by private citizens. However, MVP is not enough to achieve full scalability.

OmiseGO (OMG), the blockchain team working on Plasma MVP implementation, intends to use the OMG Network to move past the minimum viable product and toward creating a plasma implementation closer to what was originally laid out in the Plasma white paper.

“The OMG Network will be able to interact with Bitcoin (or Bitcoin-like blockchains) and other blockchain platforms through clearinghouses in state channels or contracts, as well as with digital fiat platforms and economies through collateralized fiat tokens. This, in combination with virtually unlimited scalability, will enable the OMG Network to serve essentially all global transactions simultaneously.”

Certainly, what OmiseGO is suggesting would be more than capable of competing with Visa (at least as far as transaction speeds go), but that’s not what Ethereum is so close to releasing. Moreover, scaling the blockchain is not the number one concern of countries considering an CBDC.

Central banks don’t seem sold on EBDCs, regardless of scalability concerns. More than a few countries have discussed or are in the process of exploring a national cryptocurrency, but reviews are mixed and the jury’s still out.

Countries considering national cryptocurrencies are concerned about KYC, AML, and other identity verification issues. They are concerned about the stability of currency value. They are concerned about the immutability of transactions. They want centralized control of the monetary system so that they can promote economic growth. Plasma has very little to do with any of that.

Hypothetically, a more fully fleshed out plasma implementation, like what OMG intends to create, would allow for a global system of CBDCs, but probably not on Ethereum. Rather, if and when plasma is fully implemented and complete blockchain interoperability is achieved, banks could create their own blockchains with their own governance systems, allowing them to decide what level of decentralization or code complexity best suits their needs.  


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