Excerpt
Learn about e-Cash technologies like Cashu, Fedi and the Fedimint protocol, as well as the interesting concept of shared custody. I talk about the advantages, the trade-offs compared to Lightning in self-custody, and look at the significant role these applications could play in the future of Bitcoin. Join me to discover whether Fedimint and shared custody could pave the way for wider Bitcoin adoption.
Transcript
Q: What role do you think apps like Fedi will play in the future of Bitcoin? Can they replace Lightning payments?
A: So, first of all, what is Fedi? Fedi is a company and a wallet of the same name, which is using the Fediment protocol. The Fediment protocol is an open-source call to custody and transact bitcoin in a community setup.
What is Fedimint?
What does that mean? So, Fedimint is a technology, a protocol, like the Bitcoin protocol, that allows federated custody over bitcoin funds in a community. So, for instance, I could set up a Bitcoin for Fairness community federation, with a couple of trusted members of the community who are the guardians of the community funds.
The bitcoin of the community, the heart of a federation, is a mint, which is basically guarded by those trusted community members. And that mint is issuing eCash notes whenever a community member sends bitcoin into the mint.
How Fedi Works
So let me say it in another way. Fedi is a wallet that is using the Fedimint protocol. There will be others. For instance, Mutiny [the wallet has shut down] is at the moment implementing Fedimints into their Lightning wallet as well.
And the mint itself, when you have 20 people, 100 people of a community, all of these people are using the Fedi wallet, for instance. Then you have five people of that community, the elder community, or very respected people, who are the shared custodians of the money in the community.
So that means those five or six people all hold a part of the private keys, and they basically guard the funds of the whole community.
Fedi Compared to Early Banking
And it’s basically similar to what banks did in the early days when money came up and we had merchants traveling around. First, they used gold as money, but, of course, gold was heavy. You can’t carry it all over the world. And so the merchants put their gold into banks, and the banks gave them a note in exchange, showing them, okay, whenever you come back with that bank note, you can redeem your gold. So that’s what’s called an IOU.
And that’s basically the same with eCash in these Fedimint federations. So you bring your bitcoin, it might be too complicated for you to self-custody, or you don’t want to, or whatever. You pay your bitcoin into the mint, and the mint issues eCash notes for you, which are digital tokens.
You, as the user, you don’t see anything in the Fedi wallet. You just see how many satoshis you own. But then inside of the app, technically, it’s eCash.
Benefits of eCash
And the great thing is about these eCash notes is that the mint, the guardians, cannot see what you are doing with your money. It’s very private. And it’s also like with the gold, whenever someone comes with banknote, they could redeem the gold, and it’s the same with eCash. So whenever someone comes with eCash and wants to redeem the bitcoin, they can. It doesn’t matter who it is or who sent the money into the mint in the first place.
As I said before, Fedi is only one app which is facilitating this Fedimint protocol. They have their own approach with community chats, and you can basically send money within the chat. I think this is a great use case.
And just this week, when I was in Bitcoin Witsand in South Africa, I used Fedi to settle my 100,000 satoshi debt that I had by sending those sats with Fedimint’s eCash, and I could send it offline. So that’s also an advantage of eCash. You can send it even when you’re not online. So the other person, the recipient, receives it in that moment when they go online.
Custodial Trade-offs
I got to say, there’s also a downside to Fedimints, because they are fully custodial. That means that you need to trust the mint, that they don’t issue more eCash tokens than they have as deposits in bitcoin, in their mint. So there is trust involved. eCash is fully custodial, and you need to trust that the members of the Mint don’t run off with your money.
That’s, of course, a downside. But if you think about the fact that you might really have very trusted people as your guardians, and there’s a lot of, in African countries, you have a lot of these saving communities. That means that in these communities, they also trust those who hold the funds for the others.
And so it’s like a little bit. In Austria, we had this Sparverein in every restaurant where also the restaurant owner basically was holding the funds for all the people in these little boxes where people put their banknotes and their cash in to save money. And Fedimint is a little bit like that.
Rising Fees and Scaling Bitcoin
Now, coming to the role of Fedi and Fedimints in general, as on-chain fees have been rising recently. As I said before, it’s important that they also will rise in the future. It’s possible that transaction fees are going to be as high as a value of $500 or even more per transaction.
And that’s why UTXO management is so important. Where I recently added a lesson to the (L)earn Bitcoin course, that’s why it’s so important.
And I also suggest that you stop using very low amounts on the Bitcoin blockchain itself. Either use Liquid or use Lightning for that, or eCash systems like Fedi from Fedimints or Cashu. It’s another protocol for eCash.
Why Fedimints Matter
And so we will see different levels of custodianship or self custodianship in the future, as not everyone, sadly, will be able to own on-chain bitcoin. Because if the fees go up to $500, your on-chain bitcoin should at least have a value of $50,000. Otherwise, the fees are much too high, and it’s uneconomical.
And a Fedimint can be a mitigator here, as small amounts can be pooled into the federation, and the whole amount is custodied by a couple of trusted members of the community.
So you won’t have fully trustless ownership. But as a member of the community, you have custodians you trust and know. And as long as no one can prevent you from spending and redeeming your money, this is hopefully fine.
Will Fedimints Replace Lightning?
From a technical standpoint, I don’t think that Fedimints will replace Lightning because Lightning is needed. Lightning gateways are basically used to swap Lightning, bitcoin and eCash. So you need the Lightning nodes and the gateways, otherwise you can’t have Fedimints.
So what the Fedimint and the Lightning gateway is doing is like, imagine a woman with two bags of money. In one, she has the bitcoin Lightning and in the other the Lightning eCash tokens. And so she’s willing, basically, to sell either for the other, and that is what happens in a Fedimint.
And if you mean replacing Lightning in terms of the amount of payments being done, I mean, this might be because you have to distinguish between custodial Lightning and Lightning in self-custody. It’s not the same. I mean, it’s the same value, and it’s Lightning bitcoin. But the trade-offs are very different.
So I would say Fedimints are in the middle of the two options. I assume you can trust your community members more than a custodian that you don’t know. And the custodian also has to follow regulations with what happened recently with Wallet of Satoshi that they, for instance, ceased their operations in the USA because of regulations because they would KYCed their customers and they didn’t want to do that.
Final Thoughts
So, self-custody, Lightning self-custody is of course the best, then shared custody in Fedimints, then, I would say, it’s custodial Lightning that’s on the lower level of self-sovereignty.
So, in general I believe that eCash, be it Fedimints or Cashu or other protocols that might come up are a great alternative and a great way to additionally scale Bitcoin so that the most people possibly can use Bitcoin and I think Fedi and Fedimint will play an important role in the future of Bitcoin.
