An analysis of pervasive payment channel networks for Central Bank Digital Currencies

Abstract

The recent advancement of blockchain technology presents interesting opportunities that are worth a systematic investigation for their potential use in a Central Bank Digital Currency (CBDC). A blockchain alone has known scalability issues that can be overcome by, e.g., a layer-2 payment channel network (PCN). However, not all aspects of such a PCN are easy to specify and optimize. Therefore, its overall behavior, given the multitude of decentralized and individually configured nodes, is challenging to fully comprehend. In this paper, we consider a two-layer hypothetical CBDC in which the wholesale layer utilizes a permissioned blockchain, which ensures high integrity and verifiability, while the retail layer leverages an off-ledger PCN model (with pervasive nodes distributed on a large-scale) that supports instant, privacy-preserving, and retail payments. We systematically analyze the performances of two families of PCNs, namely SF-PCNs and SH-PCNs, characterized respectively by a Scale-Free topology and a Semi-Hierarchical topology. Through extensive simulations and analyses, we offer insights into optimizing PCN structures for CBDCs by exploring the trade-offs among liquidity locked by market operators, payment success rate, throughput, payment completion time, as well as load on the underlying blockchain. Although both SH-PCNs and SF-PCNs can offer state-of-the-art guarantees of fault-tolerance and integrity, we demonstrate that SH-PCNs are better suited for handling large volumes of payments, scale better with the number of network nodes, are more aligned with the anatomy of the current monetary and financial system, and therefore should be preferred in CBDC designs.