Curve and the Bank for International Settlements explore the foreign exchange business: an in-depth analysis of the Mariana project

Introduction

Mariana Project is an experimental project that aims to explore the feasibility of using decentralized finance (DeFi) technology to facilitate foreign exchange (FX) and cross-border payment transactions. The project adopts the wholesale central bank digital currency (wCBDC) framework, combined with liquidity pools and decentralized trading methods, and aims to solve the complexity and risks in the traditional foreign exchange market through an automated market maker (AMM) solution combined with central bank governance.

The global financial landscape is changing rapidly with the tokenization and expansion of digital assets. As one of the world's largest financial markets, the foreign exchange market has a daily trading volume of up to $7.5 trillion and may undergo significant changes in the future through tokenization solutions. Against the backdrop of the G20's commitment to improving cross-border payments, the Mariana project adds new impetus to this vision through the combination of wCBDC and automated foreign exchange trading and settlement.

Project Scope and Objectives

Mariana is a proof-of-concept (PoC) project developed by the BIS Innovation Centre, the Bank of France, the Monetary Authority of Singapore and the Swiss National Bank. The project explores three key dimensions:

1. Joint trading and settlement through AMM: The project studies how to use wCBDC for foreign exchange trading and settlement so that it can be completed in a single transaction.

2. Interoperability between wCBDC networks: The mobility and seamless transmission of wCBDC between blockchain networks were tested to ensure interoperability between domestic platforms and international networks.

3. Decentralized transactions using unified wCBDC standards: The project adopts unified technical standards for wCBDC and explores the feasibility of implementing the governance functions required by central banks to ensure appropriate controls over issuance, redemption and access.

The overall goal of the project is to create a secure, transparent and efficient framework for foreign exchange trading and settlement by introducing DeFi concepts while maintaining the autonomy of central banks.

High-level architecture and key components

The architecture of the Mariana project is built around three main components:

- Wholesale central bank digital currency (wCBDC): The central bank issues wCBDC on a permissioned blockchain platform through which commercial banks can conduct foreign exchange transactions.

- Bridging technology: Bridging technology allows wCBDC to be seamlessly transferred between domestic platforms and international networks. The design ensures that the central bank retains control over the issuance, conversion and recovery of wCBDC, and ensures that wCBDC is fully interchangeable between different networks.

- Automated Market Maker (AMM): AMM acts as a decentralized liquidity pool that executes foreign exchange transactions using wCBDC. The design of AMM is based on the Constant Function Market Maker (CFMM), a common pricing mechanism in DeFi that determines prices through a price curve.

Wholesale CBDC design

The wCBDC design in the Mariana project is inspired by the technical standards widely adopted in the public blockchain ecosystem, especially the ERC-20 standard for fungible tokens. This allows the wCBDC to be compatible across networks and enable the governance mechanisms required by central banks. Key governance features include:

- Issuance and redemption: The central bank controls the issuance and redemption of wCBDC, ensuring proper management of supply.

- Access control: The central bank can restrict access to wCBDC through a whitelist, ensuring that only qualified commercial banks can hold, transfer and receive wCBDC.

- wCBDC Recycling: In the event of sanctions or violations, the central bank can recycle wCBDC from commercial banks to maintain control over those in circulation.

- Upgradability: Central banks can upgrade the wCBDC contract to fix issues or introduce new features without disrupting the network’s operations.

Bridge Design

The bridging technology implemented in the Mariana project is essential to enable the transfer of wCBDC between domestic platforms and international networks. Each bridge consists of two smart contracts, one on the domestic platform and the other on the international network. The information relayer is responsible for the communication between these two contracts, enabling the secure transfer of wCBDC. The bridge design also ensures that:

- wCBDC is fungible between platforms.

- The Central Bank retains control over the transfer process and is able to approve or reject transfers.

- The bridge system has a redundant design with multiple information relays to ensure resilience and 24/7 availability.

Automated Market Maker (AMM) Design

Mariana's AMM is based on the Curve V2 protocol, a hybrid function market maker (HFMM) that combines a constant product price curve with a constant sum pricing mechanism. This design ensures:

- Liquidity providers (commercial banks) can add liquidity to the pool in any currency (EUR, CHF, SGD) and receive LP tokens representing their share of the pool.

- Liquidity takers can trade wCBDC with the pool, pay transaction fees, and face slippage based on the price curve.

- AMM can dynamically adjust the liquidity concentration around the current transaction price, thereby minimizing slippage and reducing the risk of front-running.

AMM not only provides reference prices for foreign exchange transactions, but also serves as a decentralized foreign exchange trading platform. Combining three currencies (Euro, Swiss Franc and Singapore Dollar) in one liquidity pool increases the size of the pool, reduces market fragmentation, and improves price discovery and trading efficiency.

Use cases and potential impact

Project Mariana is designed to support two main use cases:

1. Cross-border foreign exchange transactions: Commercial banks can use AMM to execute foreign exchange transactions for cross-border payments and settle wCBDC in real time. This reduces credit risk and settlement risk in the traditional foreign exchange market.

2. Liquidity provision: Commercial banks can provide liquidity to AMMs and earn fee returns by providing wCBDC to liquidity pools. This promotes a more efficient foreign exchange market, improves liquidity supply and price stability.

The potential impact of the Mariana project is not limited to the foreign exchange market. By integrating DeFi mechanisms with central bank digital currencies, the project demonstrates the future of cross-border payments, in which traditional financial infrastructure may be enhanced or even replaced by tokenized solutions. Using AMMs for foreign exchange transactions can significantly reduce the need for intermediaries, lower transaction costs, and increase market transparency.

Challenges and thoughts

Although Project Mariana demonstrates the potential benefits of wCBDC and AMM for FX trading, many challenges remain:

- Governance and Regulation: This project is purely experimental and further work is needed to establish a governance framework that meets regulatory requirements and central bank authorization. The governance model of the domestic platform and the AMM itself needs to be developed and tested.

- Interoperability and standardization: To achieve interoperability between different wCBDC platforms, common technical standards and protocols must be adopted. Ensuring that these standards are widely accepted across jurisdictions will be key to the success of the project.

- Privacy and Security: Although DeFi mechanisms provide transparency, they also raise concerns about data privacy and security. Central banks need to find a balance between transparency in foreign exchange transactions and protecting sensitive information.

in conclusion

The Mariana project is a groundbreaking experiment that combines the traditional financial system with emerging DeFi technologies. By leveraging wCBDC and AMM, the project provides potential solutions to some key problems in the foreign exchange market, including settlement risk, liquidity fragmentation, and inefficiencies in cross-border payments. Although the project is still in its early stages, it provides valuable insights into the future of tokenized finance and the role of central banks in shaping this new financial landscape.

Looking ahead, the Mariana project’s final report will further elaborate on the project’s findings, explore considerations for central banks, and identify potential areas for future research and development. As the global financial system continues to evolve, projects like Mariana will play a key role in defining the next generation of cross-border payment solutions.