Back Matter
Author: Parma Bains

VI. References

1

This note was prepared by Parma Bains with input from Fabiana Melo (MCM).

2

The Lightning Network is a second-layer protocol that connects users through of-chain channels. These channels allow connected users to complete multiple transactions of chain, before the transactions are closed out and settled on chain, which makes for faster processing and lower costs—at the expense of reduced transparency and security.

3

These parallel chains connect to the main blockchain via a two-way peg can store the actual data of transaction, leaving main chains to store just proof of correctness.

4

Any reference to existing crypto assets, distributed networks, and companies in this paper uses publicly available information and does not mean to endorse or analyze specific features of crypto assets, distributed networks or arrangements.

5

Technology neutral denotes an unbiased approach to the use of technology in financial services based on input and outcome; technology agnostic refers to an unbiased approach to technology, but one where policies are informed by specific risks generated by the outcomes the technology produces. As technologies become more deeply ingrained in financial services, regulatory authorities may not remain neutral and instead become agnostic to the types of technologies used, taking positions of support or concern depending on the risks and benefits of such technologies.

6

IMF and World Bank (2018). Although the BFA includes many elements, this note will focus only on the consensus-mechanism aspects of the digital architecture.

7

The problem focuses on an imagined scenario centered in the Byzantium region of the Eastern Roman Empire. In this scenario, three Byzantine generals and their armies are encamped around an enemy city. Each general and their armies are in separate camps on different sides of the city. For the generals to successfully attack the city, they must all act together, and to do this they must agree on a time of attack; however, communication between the generals is only possible through messengers who must cross from one camp to the other through enemy territory. This approach creates several issues, among them: the messengers could get captured or killed on the way from one camp to another, or they could get captured or killed on their return journey. If they are captured, the enemy might read or change the message, compromising the strategy, which means generals can never be sure that the message received is genuine. It’s also possible that one or more generals might be traitors and send false messages.

8

Double spending refers to the risk that a unit of digital money or crypto assets could be spent twice. This concern is largely a nonissue in a centralized system, where a single entity can determine whether a transaction is valid.

9

Not all CBDCs are built on DLT.

10

Financial integrity matters are more fully covered in IMF publications on AML/CFT issues related to crypto assets; see Schwarz and others 2021a, 2021b.

11

Many types of consensus mechanisms that underpin public blockchains can only deliver probabilistic settlement due to the possibility of forks in the blockchain which might cancel earlier transactions if they are not included in the longest chain.

12

Well-known use cases are Bitcoin, Litecoin, and Dogecoin.

13

Forks can be “soft,” which are backward compatible and temporary in nature, or “hard,” which create permanent new chains.

17

Well-known use cases are Cardano, Tezos, and Ethereum (announced—as of publication, the Ethereum Network is transitioning from Proof-of-Work consensus to Proof-of-Stake). Ethereum’s transition aims to solve issues of environmental impact, transaction throughput, and aims for greater decentralization. Over the long term, Ethereum 2.0 might reduce transaction fees through sharding—a process of splitting the database and creating new chains.

18

In PoS, security improves with scalability; therefore, until they achieve sufficient scale, nascent networks might benefit from proof-of-concept to proof-of-value–style controlled environments, such as certain types of sandboxes.

19

Well-known use cases are EOS, Ark, BitShares, and Tezos.

20

Well-known use cases are Hyperledger Fabric and Consensys Quorum.

21

These views involve a client sending a request to the leader node; this request being broadcast to backup nodes; the nodes acting on this request, voting between themselves, and then replying to the client; and then finally the client waiting for replies from different nodes, ensuring the result is the same.

22

Well-known use cases are Ripple and Stellar.

23

For example, you might trust five individuals known to you, but you do not trust a sixth, unknown individual. The five known individuals would be your quorum slice; however, one of your five trusted individuals might know and trust the sixth individual. This is a quorum intersection, as your quorum slice overlaps with another. The sixth individual might have a further five individuals who are not known to your quorum slice but are known to the sixth individual. This can mean that from a small subset of known individuals, an agreement is reached across the network. This approach can create strong network security, as well-behaved nodes may not want to keep failed nodes in their slices out of concern the failed nodes will affect them negatively.

24

A well-known use case is Diem.

25

A mempool is used to store information such as unconfrmed transactions that are waiting to get validated.

26

A well-known use case is Hyperledger Sawtooth.

27

While the PoW can be expandable and so scalable, it does not necessarily mean that increased volumes will reduce the cost of each transaction.

28

SupTech refers to Supervisory Technology, or the use of new technology to support the objectives of authorities.

Blockchain Consensus Mechanisms: A Primer for Supervisors
Author: Parma Bains