How Fedimint Scales Bitcoin Custody – Bitcoin Magazine
Fedi Inc. announced on Tuesday that it had collected $ 4.2 million in a seed round as the company tries to get more users on board Bitcoin with the Fedi app, according to a statement sent to Bitcoin Magazine.
The application, which the company expects to start rolling out in Q1 2023, will provide a user interface for Fedimint, an open source protocol that utilizes unified Chaumian Ecash coins to decentralize bitcoin deposits and improve currency scaling capabilities.
“Fedi and Fedimint will help put money back in the hands of everyone, everywhere,” Fedi Inc. co-founder and CEO Obi Nwosu said in a statement. “This creates a brighter future for billions and especially for those struggling under oppressive regimes, which ultimately makes the world a better place.”
How Fedimint works
Fedimint is based on the concept second-party custodywhich improves third-party custody solutions and even some self-custody (first-party custody) setup.
Second-party custody involves relying on family members or friends with the custody of one’s bitcoin in a way that enhances the trust and security models inherent in the classic centralized third-party custody solutions – which are often composed of strangers whose incentives do not necessarily match. with the user’s.
It is not uncommon for third-party managers to fall short when it comes to securing bitcoin to a given set of users. Not only is this a risk because the third party represents a single point of error, but the success of this setup is largely dependent on the incentives that the custodian has to secure users’ funds. For a stranger, the incentives are more in line with the need to either make money from the custody service, openly steal or re-mortgage the funds than to methodically ensure best practices for the security of these bitcoin.
Second-party custody seeks to improve this model by allowing users to trust parties they already trust in real life – such as close friends or family members – to secure their money instead of outsourcing this task entirely to an institutional stranger.
With Fedimint, users can create a community whose technical leaders will be tech-savvy and reliable enough to ensure the system works properly. Although the concept of trust is foreign to most Bitcoin followers, the reality is that some may include an aspect of trust in their self-defense setup today without being aware of it.
When users have bitcoin themselves, they have to make decisions related to backing up those funds. While they may be in possession of their hardware wallets or signing devices at any time, the 12 or 24 words must no doubt be kept to reduce the risk of loss or theft. In doing so, users have the choice of storing them in a safe at home, in a friend’s safe or in a bank. The latter is subject to seizure by the authorities as the banks must comply with any subpoenas, while the former is susceptible to $ 5 key attacks. Leaving the reserve words to a friend can be smart if the friend is very credible – reduces against seizures – and not so publicly known – to curb against indirect $ 5 wrench attacks. However, it is still a simple mistake.
Ideally, therefore, the backup codes for a self-setup will be shared using a cryptographically secure model such as Shamir’s Secret Sharing and each part given to a trusted other party. The problem with this, in addition to the technical complexity of designing such a scheme, is again trust; the user must trust not only every other party, but collectively that they do not cooperate with the user and steal their bitcoin. Therefore, even the most sophisticated of self-defense setups can include a certain level of trust.
Fedimint brings this assumption of trust – second-party trust – into a model that is less technically complex than self-storage and more scalable and private. This is how it works.
Chaumian Ecash
As mentioned above, Fedimint is based on Federated Chaumian Ecash.
Chaumian Ecash is the digital cash invented by Dr. David Chaum, an early cryptographer who in the 1980s tried to alleviate the privacy issues inherent in the digitization of money – a trend the researcher predicted when digital means of communication began to emerge in his time. . Chaum was concerned about the impending privacy risk of digitized money, where banks would be able to track people’s consumption, and the peer-to-peer nature of physical cash would be lost.
The issuance and redemption of Chaum’s digital cash remained centralized, even though the transaction was P2P. The researcher did not try to detach himself from state money in itself; rather, he sought a means of conducting personal cash transactions online.
Chaum’s money utilized cryptography to allow a user to deposit money into a bank and receive an “I owe you” (IOU) note that can be traded among other people. That banknote promised its holder X the amount of money to be redeemed by the bank at any given time – a concept popular with banknotes from the time of the gold standard. Given the low divisibility and transportability of gold, IOU gold banknotes allowed for easier transfer and carrying of “gold”. In the same way, a holder of Chaumian Ecash will be able to redeem it for real money in the bank that issued it.
Chaum’s model, of course, depended on the bank’s reputation. Customers who trade in the bank’s IOU note must rely on the bank’s ability to comply with the contract stipulated in the memorandum. Otherwise, customers would not see any value in them, and thus waive transactions in these notes.
On the privacy side, Chaum’s Ecash used blind signatures, a cryptographic trick that prevents the bank from knowing who owned the banknote. Without it, it would be trivial to link a user’s identity with a given note.
The example given by Chaum himself to illustrate this concept depended on carbon copy paper envelopes. The user can get a blind signature – a signature on something the signer does not know the contents of – by putting the data they want signed inside the envelope made of carbon paper and sealing it. The signer could sign the envelope itself, and due to the carbon paper, the signature would “leak” to the data and sign it as well.
With Chaum’s blind signature protocol, the depositor would send a blind piece of data to the bank. After receiving the data blindly signed, the depositor will be able to blind it – which would allow them to transfer it by giving it to another person. After a given number of trades, the note can be redeemed at the bank for the corresponding amount at any time. At the time of redemption, the bank will be able to check whether it has previously signed that piece of data and whether it had already been redeemed or not – check for validity and shield against double consumption.
Connected
A federation improves the centralization of Chaumian Ecash. This is what allows decentralization of custody and thus also improves the more popular third-party custody solutions in the Bitcoin ecosystem.
A federation is a technical setup formed among several parties with a multi-signature Bitcoin address. A multi-signature, abbreviated multisig, makes it possible to lock funds in a Bitcoin address that requires a minimum amount of the parties to agree before moving funds. In practice, this works by requiring several signatures – hence the name – so that the funds can be unlocked and moved. Common multisig layouts include 2-of-3 and 3-of-5; in the former three signatures make up the total setup and two are needed to move bitcoin, while in the latter three signatures out of a total of five are required before BTC can be used.
The multi-signature ensures that a custodian does not become junk and uses the bitcoin it has in custody on behalf of the user. The user must still trust the managers collectively, but the resilience of the system increases as more people the user supposedly trusts in real life, must cooperate with the user to steal their money. This is why the use of known and trusted parties to form the federation is a must.
Furthermore, multisig also ensures that IOUs issued by the federation are also a multisig, which requires the same decision-making ability for the movement of funds and means that a guardian cannot create IOUs alone.
The answer to scaling private Bitcoin custody?
By putting it all together, Fedimint leverages a decentralized trust system to enable Bitcoin users to form communities with friends and family, where money transactions are cheap, fast and anonymous, and custody is simplified and strengthened.
Users can join a Fedimint community by depositing bitcoin into the federation and receiving the corresponding amount of IOU tokens, which can be transferred anonymously to members of that community. The receiving party then replaces the received tokens with new ones: a process similar to Chaum’s blind signature scheme allows the federation to check that the sender did not double-use these tokens. After a successful exchange of new tokens, the recipient marks the transaction as completed.
The Lightning Network, Bitcoin’s second-tier protocol for fast and cheap payments, can join the Fedimint mix to further strengthen its setup. More specifically, Lightning allows users in a federation to be interoperable with the entire Bitcoin ecosystem.
In a nutshell, Fedimint wallets have the potential to provide strong privacy to Bitcoin users with better security than third-party deposit setup and more ease of use than full-featured self-deposit solutions. It can be the tool that responds to the challenge of scaling up self-custody, while encouraging more people to give up depositing the bitcoin deposit to a centralized depository, which is actually a simple mistake – one of the many possible solutions for a feasible hyperbitcoinized world.
