Fed and MIT’s CBDC research: Distributed Ledger tech has ‘downsides’

Theoretical research into a Central Bank Digital Currency (CBDC) in the U.S. has found that distributed ledger architecture has “downsides.”

The Federal Reserve Bank of Boston and the Digital Currency Initiative at the Massachusetts Institute of Technology published their findings of their initial research into a CBDC on Feb 3.

The research project, dubbed “Project Hamilton,” tested a “hypothetical general purpose CBDC” using two potential models.

The first one processed transactions through “ordering server” distributed ledger technology (DLT), which organized the validated transactions into blocks to create an ordered transaction history.

The researchers were able to use this architecture to complete over 99% of transactions in under two seconds and the majority of transactions in under 0.7 seconds.

However, the ordering server resulted in a number of issues due to being run under the control of a single actor, the researchers concluding that “a distributed ledger architecture has downsides. “

“For example, it creates performance bottlenecks, and requires the central transaction processor to maintain transaction history, which one of our designs does not, resulting in significantly improved transaction throughput scalability properties.”

They added that despite using ideas from blockchain technology, a “distributed ledger operating under the jurisdiction of different actors was not needed.”

The second architecture processed transactions in parallel on multiple computers, rather than relying on a single ordering server to prevent double spends. The researchers wrote that although “this results in superior scalability,” it did not “materialize an ordered history for all transactions.”

It demonstrated throughput of 1.7 million transactions per second with 99% of transactions durably completing in under a second, and the majority of transactions completing in under half a second.

Related: Fed issues discussion paper on benefits and risks of a digital dollar

Project Hamilton was first announced in 2020 to explore the use of existing and new technologies to build and test a hypothetical digital currency platform. The code is the first contribution to OpenCBDC, a project maintained by MIT which will serve as a platform for further CBDC research.

Boston Fed Executive Vice President and Interim Chief Operating Officer Jim Cunha said that the project illustrates that it is “critical” for change makers to not only understand how emerging technologies could support a potential CBDC, but also what challenges remain.

“This collaboration between MIT and our technologists has created a scalable CBDC research model that allows us to learn more about these technologies and the choices that should be considered when designing a CBDC.”

The director of the Digital Currency Initiative at MIT Neha Narula said that “there are still many remaining challenges in determining whether or how to adopt a central bank payment system for the United States.”


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Federal Reserve Bank of Boston, MIT Publish CBDC Research

Key Takeaways

  • The Boston Fed, M.I.T.-run Project Hamilton has published its Phase One results.
  • Project Hamilton is an effort to conduct research and build technology for a central bank digital currency.
  • While the project is not directly building a USDC that would be usable in the U.S., it seeks to inform policy decisions with respect to CBDC technology.

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The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology have published the results from Phase One of Project Hamilton, a multi-year collaborative research endeavor focused on CBDC research. 

Phase One Complete

Earlier today, the Federal Reserve Bank of Boston and MIT published the results of Phase One of Project Hamilton, a collaborative effort to research and design a workable prototype for a CBDC that could scale to a nation the size of the United States.

It should be emphasized that no branch of the United States government has ordered the creation or implementation of a formal CBDC. However, the Federal Reserve Bank of Boston does fall under the authority of the Federal Reserve System.

Phase One sought to build a transaction processing software, dubbed OpenCBDC, that was sufficiently technically sound to function as a “general-purpose CBDC” for a nation as large as the U.S. The Boston Fed and MIT have released OpenCBDC as open-source software on GitHub.

In regard to building a core processing engine that could support a CBDC, the “team met its goal”: speeds surpassed 1.7 million transactions per second, with the “vast majority” reaching settlement finality within two seconds. The paper also reads that the technology possesses flexibility that would allow it to be adjusted depending on policy decisions. 

The Boston Fed is responsible for the First District of the Federal Reserve. While the research is conducted independently of the Federal Reserve Board of Governor’s deliberations, Project Hamilton does seek to inform and enrich policy decisions surrounding a United States’ central bank digital currency. Moreover, the Fed itself does have a TechLab that also conducts CBDC research and experimentation. 

User privacy is one of the project’s stated priorities when it comes to its design, though the language used suggests the privacy consideration is primarily focused on protecting users’ from third parties. 

In Phase Two, the Boston Fed and MIT will research other technical designs to further optimize the Phase One technology’s “robust privacy, resiliency, and functionality,” while better elucidating tradeoffs between different designs. This phase will take years. 

Project Hamilton was named after two Hamiltons: Alexander Hamilton, the U.S.’s first Treasury Secretary and primary founder of the Bank of the United States (a precursor to the Federal Reserve); and Margaret Hamilton, an engineering software director for MIT’s Instrumentation Lab that built software for NASA’s Apollo mission. 

Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and several other cryptocurrencies. 

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