Cross-border Exchange of CBDCs using Layer-2 Blockchain

Cross-Border Exchange of CBDCs Using Layer-2 Blockchain

This paper introduces an innovative approach for cross-border trading of Central Bank Digital Currencies (CBDCs) through a multi-layer blockchain architecture. Specifically, the authors propose a permissioned Layer-2 (L2) blockchain that leverages the public consensus of an underlying network to ensure secure and interoperable CBDC transactions. This framework is further expanded by incorporating multiple Layer-3 (L3) blockchains, each hosting its own decentralized exchanges (DEXes) with different Automated Market Maker (AMM) configurations, which compete for cost-effectiveness.

Methodological Insights

The proposed system architecture involves a non-custodial Layer-2 rollup on a public Layer-1 blockchain that integrates Layer-3 blockchains. These L3s operate decentralized exchanges or other decentralized finance (DeFi) protocols utilizing CBDCs. The system is designed for dynamic cost optimization; it automatically selects the L3 and AMM-DEX offering the optimal transaction costs at any given time. It also supports transaction privacy and compliance with regulatory standards through the use of permissioned networks requiring participants to undergo KYC procedures.

A rule-based router is introduced to analyze trade costs and direct transactions toward L3 operators with the minimum fees, an approach that combines the strengths of both private and public blockchains. This is compared with Project Mariana's L1-based AMM framework, which the authors argue is less cost-efficient due to the single-operator setup.

Simulation and Results

The authors utilize historical foreign exchange (FX) data to simulate the cost efficiency of their proposed architecture compared to Project Mariana. The analysis includes factors such as gas fees, liquidity pool (LP) swap fees, and price impact, revealing that L2-L3 networks significantly reduce trade costs, especially under high-gas conditions.

Notably, the L2-L3 Exchange setup outperforms conventional single-AMM systems like Project Mariana in both small and large transactions, exhibiting enhanced resilience to liquidity fragmentation across multiple L3s. The simulation demonstrates competitive performance under varying market conditions, suggesting a robust capability for handling diverse transaction volumes while minimizing costs.

Contributions and Implications

This work makes several contributions to the field of decentralized finance and CBDC implementation. It demonstrates that a multi-AMM system on L2 can be more cost-effective than a single-AMM approach with fragmented liquidity. The study provides a detailed cost analysis for CBDC swaps on different AMM configurations and presents a quantitative framework for evaluating cross-border CBDC efficiency on DEXes.

Additionally, the authors offer a comprehensive simulation framework based on historical FX data, which can be adapted for future cross-border CBDC projects or private DeFi ecosystems. This work points toward a future where Layer-2 and Layer-3 architectures could play a significant role in the scalability and cost-efficiency of decentralized financial systems involving CBDCs.

Conclusion

This paper proposes a sophisticated multi-layer blockchain architecture for cross-border CBDC exchanges, demonstrating through rigorous simulation analysis that such a system can achieve superior cost-efficiency. The approach provides a promising path for developing scalable, secure, and cost-effective decentralized financial infrastructures, aligning with the evolving landscape of digital currencies and DeFi protocols. Future work could further explore optimization strategies for AMM selections and the integration of additional DeFi services within this layered framework.