Fedi Inc. on Tuesday announced that it had raised $4.2 million in a seed round as the company seeks to onboard more users onto Bitcoin with the Fedi app, per a statement sent to Bitcoin Magazine.
The application, which the company expects to begin rolling out in Q1 2023, will provide a user interface for Fedimint, an open-source protocol that leverages federated Chaumian Ecash mints to decentralize bitcoin custody and enhance the scaling capabilities of the currency.
“Fedi and Fedimint will help put monetary power back into the hands of everyone, everywhere,” said Fedi Inc. co-founder and CEO, Obi Nwosu, in a statement. “This creates brighter futures 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 of second-party custody, which improves upon third-party custody solutions and even some self-custody (first-party custody) setups.
Second-party custody involves trusting family members or friends with the custody of one’s bitcoin in a way that improves the trust and security models inherent in the classic centralized third-party custody solutions — which are often composed of strangers whose incentives don’t necessarily align with those of the user.
It isn’t uncommon for third-party custodians to fall short in properly securing the bitcoin of a given set of users. Not only is this a risk because that third party represents a single point of failure but the success of this setup is greatly dependent on the incentives that the custodian has in securing the users’ funds. For a stranger, the incentives more closely align with the necessity to either make profits from the custody service, blatantly steal, or rehypothecate the funds than to methodically ensure best practices for the safety of those bitcoin.
Second-party custody seeks to improve upon this model by having users rely on parties they already trust in real life — for example, close friends or family members — to secure their funds instead of completely outsourcing this task to an institutional stranger.
With Fedimint, users can create a community whose technical leaders will be those tech-savvy and trusted enough to ensure a proper functioning of the system. Though the concept of trust is alien to most Bitcoin proponents, the reality is some might incorporate an aspect of trust in their self-custody setup today without realizing it.
When users self-custody bitcoin, they have to make decisions relating to the backup of those funds. Whereas they can remain in possession of their hardware wallets or signing devices at all times, the 12 or 24 words arguably need to be stored away so as to mitigate the risk of loss or theft. In doing so, users need to opt between storing them in a safe at home, in a friend’s safe, or in a bank. The latter is susceptible to seizure by the government as banks need to abide by eventual subpoenas, whereas the former is susceptible to $5 wrench attacks. Leaving the backup words with a friend can be smart if the friend is highly trustworthy — mitigates against seizure — and not as publicly known — to mitigate against indirect $5 wrench attacks. However, it is still a single point of failure.
Ideally, therefore, the backup codes for a self-custody setup would be split using a cryptographically secure model such as Shamir’s Secret Sharing and each part given to a trusted second party. The issue with this, besides the technical complexity of devising such a scheme, is again trust; the user needs to trust not only each second party but collectively that they don’t collude against the user and steal their bitcoin. Therefore, even the most sophisticated of the self-custody setups might include some level of trust.
Fedimint brings that trust assumption — second-party trust — into a model that is less technically complex than self-custody and more scalable and private. Here’s how it works.
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 sought to mitigate against the privacy issues inherent in the digitization of money — a trend the researcher foresaw as digital means of communication began to emerge in his time. Chaum was concerned with the impending privacy risks of a digitized money, where banks would be able to trace people’s spending, and physical cash’s peer-to-peer nature would be lost.
The issuance and redemption of Chaum’s digital cash was still centralized, though its transacting was P2P. The researcher didn’t attempt to break free from government money per se; rather, he sought a means to conduct in-person cash trades online.
Chaum’s money leveraged cryptography to allow a user to deposit money into a bank and receive an “I owe you” (IOU) bank note that could be traded further among other people. That banknote promised its holder X amount of money to be redeemed by the bank at any given time — a concept popularized by the banknotes of the time of the gold standard. Given the not-so-great divisibility and transportability of gold, gold IOU banknotes allowed for an easier transfer and carrying of “gold.” Likewise, a holder of Chaumian Ecash would be able to redeem it for real money at the bank that issued it.
Chaum’s model, of course, relied on the reputation of the bank. Customers transacting with that bank’s IOU note would need to trust the bank’s ability to honor the contract stipulated by that note. Otherwise, customers would see no value in them and hence would forgo transacting in those notes completely.
On the privacy side of things, Chaum’s Ecash leveraged 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 relied on carbon copy paper envelopes. The user can obtain a blind signature — a signature on something which the signer doesn’t know the content of — by putting the data they want signed inside the envelope made of carbon copy paper and sealing it. The signer could sign the envelope itself, and due to the carbon copy paper the signature would “leak” to the data and sign it as well.
With Chaum’s blind signature protocol, the depositor would send a blinded piece of data to the bank. After receiving the data blindly signed, the depositor would be able to unblind it — which would allow them to transfer it by giving it to another person. After a given amount of trades, that note could at any time be redeemed back at the bank for its corresponding amount of money. At the time of redemption, the bank would be able to check whether it had previously signed that piece of data and whether it had been already redeemed or not — checking for validity and shielding against a double spend.
A federation improves upon the centralization of Chaumian Ecash. It is what allows the decentralization of custody and hence also improves upon the more popular third-party custody solutions in the Bitcoin ecosystem.
A federation is a technical setup formed among multiple parties with a multisignature Bitcoin address. A multisignature, multisig for short, enables funds to be locked up in a Bitcoin address that requires a minimum amount of those parties to agree before moving any funds. In practice, this works by requiring multiple signatures — hence the name — so the funds can be unlocked and moved. Common multisig setups include 2-of-3 and 3-of-5; in the former, three signatures comprise the setup in total and two are needed to move the bitcoin, whereas in the latter three signatures out of a total of five are needed before the BTC can be spent.
The multisignature ensures that one custodian doesn’t go rogue and spends the bitcoin it is custodying on behalf of the user. The user still needs to trust the custodians collectively, but the resilience of the system is increased as multiple people the user supposedly trusts in real life would need to collude against the user to steal their funds. This is why the usage of known and trusted parties to make up the federation is a must.
Moreover, the multisig also ensures that the IOUs issued by the federation are also a multisig, requiring the same quorum for the movement of funds and meaning that one guardian can’t create IOUs by themself.
The Answer To Scaling Private Bitcoin Custody?
Putting it all together, Fedimint leverages a decentralized trust system to enable Bitcoin users to form communities with friends and family, within which money transactions are cheap, quick and anonymous, and custody is simplified and strengthened.
Users can join a Fedimint community by depositing bitcoin to the federation and receiving the corresponding amount of IOU tokens, which can be transferred anonymously to members of that community. The receiving party then exchanges the received tokens for new ones: a process that is similar to Chaum’s blind signature scheme enables the federation to check that the sender did not double-spend those tokens. After a successful exchange for new tokens, the receiver marks the transaction as complete.
The Lightning Network, Bitcoin’s second-layer protocol for fast and cheap payments, can enter the Fedimint mix to further strengthen the 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 bring strong privacy to Bitcoin users with better security than third-party custody setups and more ease of use than fully-fledged self-custody solutions. It might be the tool that answers the challenge of scaling self-custody while encouraging more people to forgo outsourcing the custody of their bitcoin to a centralized custodian who is effectively a single point of failure — one of the many possible solutions for a feasible hyperbitcoinized world.
El Salvador Takes First Step To Issue Bitcoin Volcano Bonds
El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.
First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.
A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.
“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.
Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.
The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.
The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.
How I’ll Talk To Family Members About Bitcoin This Thanksgiving
This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
That’s it. That’s the article.
In all sincerity, that is the full message: Just don’t do it. It’s not worth it.
You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.
Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.
If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:
- Your family and friends don’t want to hear it. Move on.
- For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
- People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”
“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”
It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.
- Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
- What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice.
- It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.
Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.
However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.
Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:
“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”
If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.
Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.
Leave them alone. They will find bitcoin in their own time, just like all of us did.
This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
RGB Magic: Client-Side Contracts On Bitcoin
This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.
The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”
While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.
But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.
This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.
How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.
Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:
- You have to buy a lot of newspapers for the verification process. Not very practical.
- Each contract needs its own space in the newspaper. Not very scalable.
- The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.
For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?
If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.
Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.
This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.
To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.
So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.
In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.
Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.
Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.
RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.