Centrally Banked Cryptocurrencies (1505.06895v2)

Abstract: Current cryptocurrencies, starting with Bitcoin, build a decentralized blockchain-based transaction ledger, maintained through proofs-of-work that also generate a monetary supply. Such decentralization has benefits, such as independence from national political control, but also significant limitations in terms of scalability and computational cost. We introduce RSCoin, a cryptocurrency framework in which central banks maintain complete control over the monetary supply, but rely on a distributed set of authorities, or mintettes, to prevent double-spending. While monetary policy is centralized, RSCoin still provides strong transparency and auditability guarantees. We demonstrate, both theoretically and experimentally, the benefits of a modest degree of centralization, such as the elimination of wasteful hashing and a scalable system for avoiding double-spending attacks.

• The paper presents the RSCoin framework that redefines central banks' roles by issuing digital currency while leveraging a network of mintettes for transaction validation.
• It introduces a two-phase commit consensus mechanism that eliminates proof-of-work inefficiencies and processes over 2,000 transactions per second.
• The framework bridges sovereign monetary control and blockchain transparency, offering a scalable, policy-compliant model for future digital currencies.

An Analysis of "Centrally Banked Cryptocurrencies"

Cryptocurrencies have garnered significant attention in both academia and industry due to their potential to disrupt traditional financial systems. This paper by Danezis and Meiklejohn presents RSCoin, a framework for cryptocurrencies that reimagines the role of central banks within the cryptocurrency ecosystem. This framework introduces central banks as key players in the generation of monetary supply while leveraging a decentralized validation system to maintain the transaction ledger. This commentary provides a detailed analysis of the paper’s contributions, methodology, and potential implications for future developments in digital currencies.

Summary of Contributions

The RSCoin framework addresses two significant limitations of traditional blockchain-based cryptocurrencies: scalability and volatility. By centralizing the monetary supply while distributing transaction verification duties to a network of known entities, or "mintettes," the authors propose a model that reconciles state control over monetary policy with the technical advantages of blockchain technology. This intermediary level of centralization not only optimizes scalability but eliminates the computational inefficiencies associated with proof-of-work (PoW) mechanisms prevalent in Bitcoin and several other cryptocurrencies. The authors introduce a consensus mechanism resembling two-phase commit (2PC), which mitigates the necessity for expensive PoW and facilitates faster transaction clearing.

Key Results

Experimentally, the paper demonstrates that RSCoin can process over 2,000 transactions per second—a throughput comparable to centralized payment systems like Visa, yet significantly better than Bitcoin’s capacity. This performance is achieved in part through the linear scaling derived from the distributed consensus among mintettes, promoting transparency and accountability without burdening the central bank with transaction-level verification duties.

Theoretical and Practical Implications

Strategically, the design of RSCoin bridges the gap between sovereign control and the operation of transparent, distributed ledgers, positioning it as an attractive model for central banks exploring digital currencies. The paper hypothesizes that such a system could provide enhanced macroeconomic control by allowing central banks to issue digital currencies while retaining policy levers over monetary supply. Furthermore, the capability to prune intermediate transactions offers a pragmatic approach to managing ledger size and complexity, aligning digital cash flow with existing economic instruments.

Practically, the implementation of a two-tiered system—where central banks authorize a network of mintettes—offers robustness against single points of failure common in centralized systems, while still ensuring efficient monitoring and regulation compliance. This research aligns well with ongoing inquiries by central financial institutions into blockchain technologies for central bank digital currencies (CBDCs).

Areas for Future Research

Although this paper lays a foundation for centrally banked cryptocurrencies, several extensions and optimizations could further refine the model. Exploring interoperability between different national implementations of RSCoin could provide a seamless international digital currency exchange. Another promising area is the integration of privacy-preserving technologies, as identified by the authors, which remains crucial for safeguarding individual user data in centralized monetary systems.

Conclusion

RSCoin makes a compelling case for a balanced approach to cryptocurrency design, positioning itself as a feasible alternative for central banks seeking to issue digital currencies while maintaining scalability and transparency. The authors provide both a theoretical framework and empirical evidence supporting the approach, making it a valuable contribution to discussions on the future of digital finance. As the world inches closer toward CBDCs, frameworks like RSCoin will undoubtedly progress from academic theories to practical applications, necessitating further inquiry into their societal and technical impacts.