Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
What is Fedimint? The Custody Solution to Bitcoin Privacy
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Fedimint combines distributed custody with blind-signed ecash tokens to let Bitcoin users transact privately.
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Despite its growth, Bitcoin still needs some limitations to reach mass adoption as a fully censorship-proof payment network.
One of them is privacy. Bitcoin’s ledger is open and public, meaning anyone can track another person’s transactions if they know his public address.
The other is a custody problem. While wallet software UX has improved considerably, many Bitcoin holders still store their assets with custodians, exchanges, and lenders. This creates counterparty risk if the centralized entity flees with its funds or goes bankrupt.
Thankfully, a solution to both problems has emerged.
Fedimint allows Bitcoiners without technical know-how to experience the familiarity of custody and the privacy of cash when transacting. While not completely trustless, the protocol provides significantly less risk to holders than third-party custodians.
Here’s how Fedimint is helping bring Bitcoin users away from traditional financial rails and towards the actual Bitcoin network.
What is Fedimint?
Explanation of Fedimint. Source: Simply Bitcoin
Fedimint – short for federated mint – is an open-source protocol allowing groups of people to build Bitcoin-native federated chaumian mints.
Chaumian mints were an early privacy-enhancing e-cash scheme. Users could exchange their assets with the mint in return for a blind-signed IOU that removed any evidence about the user to whom it was issued.
These IOUs could be used later to withdraw assets or trade with other mint users. The benefit? The trading of these IOUs is completely anonymous.
Unfortunately, chaumian mints have yet to gain mainstream traction. Their centralized structure made them unfeasible in a world of governments eager to crackdown on technologies enabling anonymous payments. Moreover, if run anonymously, the market would only trust them if the operator would make off with their assets.
By contrast, a federated mint leverages the power of the Bitcoin network to split the once centralized trust of chaumian mints across multiple parties. As an asset, Bitcoin is the first in human history that can be held in a federated manner, making a distributed model possible.
How Does Fedimint Work?
While various federated mint models can exist, today, we will cover the basics of Minimint – the most active. (Note: In many circles, Minimint’s dominance as a federated Chaumian mint has made it synonymous with ‘Fedimint.’ This article may use ‘MiniMint’ and ‘Fedimint’ interchangeably.)
Architecture
Fedimint uses a Byzantine Fault Tolerant (BFT) consensus algorithm to agree on sets of client-submitted transactions. Transactions and other data are split into specific modules based on data type and then checked for transaction validity (ex., valid signature). If invalid, the transaction is discarded.
There currently exist two modules for implementing Fedimint’s e-cash functionality: First is the Fediwallet, which supports Bitcoin deposits and withdrawals. The second is Fedimint, which permits blind-signed tokens to be issued and spent. These tokens may come in different denominations. More modules with advanced functionality can be built later.
Consensus
The BFT consensus algorithm allows some parties within the federation to go offline or act maliciously without compromising the protocol. Specifically, Fedimint’s consensus protocol can handle about one-third of faulty nodes.
Wallet
The wallet receives Bitcoin deposits that clients submit in exchange for blind token IOUs. Clients may redeem those IOUs later to withdraw Bitcoin from the wallet.
The wallet uses a simple multisig configuration, requiring multiple federation members’ permission to move the wallet’s funds.
Recovering Your Federated Funds
Users can back up their funds using a seed phrase like a self-hosted Bitcoin wallet. A seed phrase consists of 12 to 24 words needed to recover one’s private key, granting him access to his Bitcoin.
Members of a community Fedimint can encrypt a backup of their private key with chosen guardians. If a user loses his signing device or seed phrase, he still has recourse to get his funds back.
Why is Fedimint Important for Bitcoin?
Fedimint brings three key benefits to the Bitcoin ecosystem that its base blockchain cannot provide.
- Reliable Custody: Due to technical requirements and personal uncertainty, many people and businesses would prefer to avoid having custody of their coins. In this case, deferring responsibility to a federated mint is the next best choice for security purposes. Average users can trust the most technically savvy members of the mint to serve as “guardians,” providing trusted services through Fedimint servers.
- Scaling: Ecash token transactions do not occur on the native Bitcoin blockchain. Therefore, Fedimints lets users effectively trade Bitcoin without waiting on its ten-minute block time.
- Private Transactions: Offering privacy tools to Bitcoin users can enhance the asset’s utility as freedom money. People in oppressive regimes with unstable property rights need certainty to hide their financial information and activity.
- Enhanced Utility: Fedimints can build modules beyond letting users send and receive cash tokens. For example, they can integrate the lightning network, smart contracts, and even a federated marketplace of products like Taro.
During the Bitcoin ++ hackathon in early summer 2022, Justin Moon – co-founder of Fedi – implemented Simplicity into a chaumian mint created with Fedimint. Simplicity is “a low-level programming language with greater flexibility and expressiveness than Bitcoin Script.”
Are Federated Mints Centralized?
Fedimints qualify as centralized because they require trust in external parties (federation members) to keep users’ coins safe. The most secure way to manage one’s Bitcoin is through cold storage, a self-hosted hardware wallet, while running a personal node/ lightning node for increased privacy.
However, with the sufficient distribution of federation members, sediments can minimize counterparty risk and eliminate single points of failure. This makes them a vastly more reliable alternative to CeFi parties while remaining resistant to nation-state-level attackers.
The trusted federation members need not be strangers. They can be friends, family, or any technologically sound community members you trust the most.
Examples of Federated Mint Projects
- MiniMint: Still a prototype, MiniMint is a modular federated ecash system written in Rust. It supports on-chain Bitcoin, lightning, and ecash transfers and includes a rudimentary CLI client.
While initially focusing on cash, it is now growing as a general framework for other federated financial applications. These could involve the use of smart contracts or even federated marketplaces.
- SCRIT1: The first published, half-written implementation of a federated chaumian mint created by Frank Braun and Jonathan Logan. Written in GO, it does not implement a Bitcoin backing.
- SCRIT2: A re-implementation of SCRIT1, including support for multiple currencies, inter-currency swaps, and more complex multiparty transactions. It’s still in private beta and contains no direct connection to Bitcoin.
- Open Transactions: A collaborative effort to build a free-software toolkit for implementing a low-trust notary server. Like Minimint, this would allow for private transactions in an environment where users cannot defraud each other, using multi-signature voting pools where notaries monitor each other in real-time.
- Fedi: A project building a mobile app on top of Fedimint that will serve as a Bitcoin wallet for interacting with the protocol. It will launch in early 2023.
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