Central Bank of Italy Unveils New DLT Protocol for Bitcoin, Enhancing Validator Confidentiality

• The Bank of Italy is exploring a permissioned blockchain based on Bitcoin.
• The financial institution is exploring alternative algorithms like FBFT and FROST.

The Central Bank of Italy recently delved into Distributed Ledger Technology (DLT), unveiling a new consensus protocol adaptable for Bitcoin (BTC). With this development, the Bank aims to preserve the confidentiality of authorized participants called validators, leveraging essential characteristics of DLT.

Central Bank of Italy Focus on DLT Protocol for Bitcoin

The Central Bank of Italy shared its plans to create a permissioned version of BTC in a research paper published on Tuesday. The bank focuses on Bitcoin, an established, extensively used, open-source DLT platform, rather than developing a completely new one from scratch. 

“In our permissioned setting, we can inherit the huge ecosystem of knowledge and applications that has been developed for the Bitcoin core infrastructure during the past decade,” the paper stated. The bank highlighted the Lighting Network as a promising development in the digital payment domain. However, the researchers stated that challenges exist for Bitcoin, as it is not designed for a permissioned setting.

Achieving consensus is resource-intensive in the permissionless environment since validators’ identities are not known. Validators have to demonstrate their integrity by either using a large amount of computational power, Proof-of-Work ( PoW), or substantial financial capital, Proof-of-Stake (PoS).

Whereas, consensus can be achieved without the need for extensive resource commitments in the permissioned environment. In this context, Proof-of-Authority (PoA) is sometimes utilized where a known set of validators participate in the consensus. This served as the Bank of Italy’s foundation for the DLT protocol for BTC.

Exploring Alternative Algorithm

As revealed in the paper, other algorithm protocols were introduced to strengthen the security of the ledger against fraud and attack, as well as ensure validators’ confidentiality. Specifically, the FROSTed Byzantine Fault Tolerance (FBFT) protocol, was introduced as an innovative approach to PoA. 

This protocol combines the Practical Byzantine Fault Tolerance (PBFT) algorithm, with the Flexible Round-Optimized Schnorr Threshold (FROST) signature scheme, a recent finding in cryptographic research. 

According to the paper, researchers have incorporated its FBFT protocol into the code of a Bitcoin-like blockchain, successfully converting its consensus component to a permissioned environment. Additionally, they conducted a performance test across different geographically distributed, realistic scenarios. 

Meanwhile, the Italian researchers intend to carry out a variety of additional Bitcoin exploration tasks in addition to the consensus protocol. In the future, the plan is to explore Layer 2 (L2) payment channel networks and payment privacy. Also, they wish to investigate cross-border payments and asset tokenization for delivery as opposed to payment.

Per Bitcoin, the primary focus of the experiment, the coin declined by 0.2% in the past day to trade at $66,134. The trading volume also declined by 28% to $27 billion.

Central Banks Exploring Blockchain Technology

Notably, the Bank of Italy is not the first central bank to work extensively with blockchain technology. For instance, the People’s Bank of China has created a customized blockchain based on Ethereum through its Digital Currency Research Institute. 

In a recent update, we covered that the Central Reserve Bank of Peru (BCR) is exploring the development of a digital currency. The bank partnered with Viettel Peru, a firm seasoned in telecommunications and digital services to pilot the development.