National vs. Public Blockchains

Many countries are watching Brazil's initiative of a permissioned governamental blockchain. Could that become a new standard for other countries? Would that be a risk to public blockchains and the overall Web3 market? I will lay out a possible future.

Lets first get an overview on the current state of the Real Digital project.

Most countries are developing CBDCs to solve the problem of instant transactions, but not Brazil. That problem was very successfully solved by the Pix solution a few years ago.

The objective with the Real Digital is to go beyond and digitize financial services in general. The way this will be done is through an EVM based permissioned hyperledger (Besu), and the first product on this stack will be a wholesale CBDC.

A wholesale CBDC means that individuals would not interact with it. Only Financial Institutions would do so. Lets see a case where Bob wants to transfer money to Alice, from Bank A to Bank B:

In that case:

1 - Bob would be destroying tokenized Bank A Reais

2 - Bank A would transfer CBDCs to Bank B

3 - Bank B would then mint Bank B Reais on Alice's account

That means that the Bank A and Bank B tokenized Reais are not fungible. At least for now.

This would already be a huge improvement on the way banks work today. Currently, whenever a bank transfer money to another, it is only transferring a massage, but the money itself is not moving. What banks use is something called Nostro and Vostro accounts.

What that means is Bank A have an account on Bank B, and vice versa. So when there is a bank transfer, a message is sent from one bank to the other, the money is simply moved in these internal accounts and from time to time there needs to be a settling between the banks.

With a CBDC the message would actually carry value, bringing a lot of efficiency into the process. A digital value transfer is always more efficient than a physical one, like cars and airplanes carrying pallets of money for banks (yes, that exists today).

For the Central Bank, this is also a big step, since they could have view of banks balance sheets in real time, and not depend on outdated balance statements. This real time view allow for much better control over systemic risk on the national financial system. #bankruns

The next step of the project is to tokenize bonds, and only then advance to other kinds of smart contracts.

The Central Bank made sure to use an EVM solution, so that they could take advantage of all the knowledge that have been developed on public blockchains so far.

With this current design, only Financial Institutions would be allowed to create smart contracts on the national blockchain. That means that all this brilliant work that have been done on public blockchains would simply be forked and used by millions of people.

AMMS, HFMM, CLAMMs, Money Markets, etc would be copied and deployed to millions of users, based on open source code.

But what about muh descentralization? Well, do you really think that most people would really care?

Now what if other countries start to use this approach?

Lets say now each country decide to have it's own blockchain. They would still be siloed from each other and need bridging solutions, but that wouldn't be so hard to solve with all that has been built over the interoperable omnichain narrative.

Now lets see what could change on this scenario. It is very likely that the Fat Protocol Thesis would not exist here, as we have seen on web2. The application layer would capture most of the value. But that doesn't mean a shiny future for DeFi projects.

Most DeFi projects are built on an open source license, which means that the code can be copied and used by Financial Institutions, and they won't have to pay anything for that.

So maybe DAOs could become Financial Institutions? I would't bet on that.

So what can be done to improve this scenario? My opinion is that a new type of license should be used by most projects. Something that bring some upside to inovators. Maybe NFTs holding the rights for Intelectual Property on public blockchains.

That would allow inovators to have some control over who can use the tech for free, and would also force institutions that want to use the tech to engage on-chain, which could help to remove barriers with regulators.

We already see signs of that happening. The Pilot One project, by JP Morgan, DBS and SBI, used Aave Arc code

Project Mariana, by BIS, is using Curve V2 tech to experiment on wholesale CBDC AMMs.

That is a nice validation for the tech, but validation doesn't pay the bills at the end of the month.

What kind of tech would do well on this scenario? In my opinion interoperability solutions, oracles, and DeFi solutions with proper license protections and a decent legal wrapper to engage with tradfi.

I'm not saying that scenario WILL happen. But it could, and we should stress the possible outcomes to prepare ourselves and guide the industry to the future we want to see.

And even if it does happen, it doesn't mean the death of public blockchains. Both can coexist.