Authors:
(1) Krzysztof Gogol, University of Zurich ([email protected]);
(2) Johnnatan Messias, Matter Labs;
(3) Malte Schlosser, University of Zurich;
(4) Benjamin Kraner, University of Zurich;
(5) Claudio Tessone, University of Zurich.
Table of Links
Abstract and 1. Introduction
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Background
2.1 Layer-2 Blockchains
2.2 Project Mariana
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Related Work and Contribution
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System Architecture
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Model
5.1 Automated Market Makers
5.2 Price Impact
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Simulation
6.1 Data and Parameters
6.2 Results
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Discussion
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Conclusions, Acknowledgements, and References
Graphs and Tables
Abstract. This paper proposes a novel multi-layer blockchain architecture for the cross-border trading of CBDCs. The permissioned layer-2, by relying on the public consensus of the underlying network, ensures the security and integrity of the transactions and interoperability with domestic CBDC implementations. Multiple Layer-3s operate various Automated Market Makers (AMMs) and compete with each other for the lowest costs. Simulations of trading costs are conducted based on historical FX rates to provide insights into the practical implications of the system, with Project Mariana as a benchmark. The study shows that a multi-layer and multi-AMM setup is more cost-efficient even with liquidity fragmentation than a single AMM.
1 Introduction
The Bitcoin network, described in a whitepaper by the anonymous individual or group known as Satoshi Nakamoto, launched in 2008 [22]. The fundamental promise of this first cryptocurrency was to establish a peer-to-peer payment system that operates independently of traditional financial intermediaries. In 2014, Vitalik Buterin introduced Ethereum [10], the next-generation blockchain with a virtual machine capable of executing computer programs known as smart contracts. With Ethereum and the Ethereum Virtual Machine (EVM), Decentralized Finance (DeFi) was born. By utilizing smart contracts, DeFi offers sophisticated financial services, such as trading, lending, borrowing, derivatives and asset management [29], [25], [9], [18].
It quickly became apparent that this new blockchain-based financial system required non-volatile tokens, giving the advent to stablecoins—tokens with values pegged to fiat currencies. The success of stablecoins prompted central banks to explore similar solutions, leading to the development of Central Bank Digital Currencies (CBDCs) [28]. While CBDCs do not necessarily have to be implemented on a blockchain, the decentralized approach promises enhanced scalability and security [4], [23], [13], [12]. Various central banks across the globe are already engaged in CBDC initiatives[4], [23], [5]. The collective effort explores ways to integrate these CBDCs into a unified marketplace, potentially transcending borders, as seen in Project Mariana by the Bank for International Settlements (BIS) [4].
This paper introduces a novel architectural framework for cross-border CBDC trading that is based on Layer-2 (L2) blockchain scaling. L2s proved to be an efficient approach for addressing the limitations of Ethereum, especially scalability and privacy [26], [32], [16]. The proposed system is the rollup (non-custodial L2), on the public L1 blockchain that seamlessly integrates additional Layer-3 (L3) blockchains, each operating decentralized exchanges (DEXes), or other DeFi protocols, utilizing CBDCs. The system automatically selects L3 and DEXes with optimal costs. This system architecture is compared to the approach of Project Mariana in a series of simulations based on the historical Foreign Exchange (FX) rates.
