CBDC consensus algorithm design choice

Abstract

In this paper, we analyze the decentralization features of Central Bank Digital Currencies (CBDCs) and evaluate the limitations of Distributed Ledger Technology (DLT) benefits in this context. Our research explores the essential characteristics of consensus algorithms, including security, finality, and efficiency, for CBDCs and considers the trade-off between transaction throughput and decentralization. After examining various options, we conclude that Proof of Work (PoW) and Proof of Stake (PoS) are unsuitable for CBDCs. However, Proof of Authority (PoA), Delegated Proof of Stake (DPoS), and Notary Services are promising alternatives. Our findings reveal that while CBDCs possess some decentralization components in their architecture, they still maintain political and logical centralization due to regulation by the Central Bank. Consequently, CBDCs can only partially leverage all the benefits of DLT, such as the ability to withstand challenges, which still depend on the Central Bank as the sole point of failure. This paper aims to equip policymakers with valuable insights to make informed decisions regarding the design of CBDC consensus algorithms.