28 Apr Fedi & Fedimint: Decentralised Chaumian E-cash on Bitcoin
Today we’re going to take a look at Fedi, a Bitcoin startup building on the Fedimint open source protocol for federated Chaumian E-cash integrated with the Lightning Network. Fedimint stands for “Federated Mint” and uses a decentralised federation similar to Blockstream’s Liquid sidechain.
What is Fedi and How is it Different From Fedimint?
This week we are taking a look at Fedi and Fedimint. To clear up any potential confusion before we even get started, Fedi is the company, and Fedimint is the open source framework. Fedi, the company, is building Bitcoin infrastructure using the Fedimint open source protocol.
Fedi is a Bitcoin startup which is creating decentralised Chaumian E-cash, using the Fedimint Chaumian E-cash protocol created by Elsirion. Fedimint is best described as a communal way to custody and transact Bitcoin with strong privacy.
If you’re a regular reader of our blog, you probably saw our article on Cashu, a Chaumian E-cash project created by CalleBTC. Fedi is another similar E-cash project for Bitcoin, which also utilises Lightning Network. Like Cashu, Fedi and Fedimint take their inspiration from David Chaum’s Chaumian E-cash implementation, Digicash.
Fedi and Cashu each share a similar vision of using layer 2 technologies like Chaumian E-cash and Lightning Network to scale Bitcoin globally, while introducing almost perfect, cash-like privacy to Bitcoin transactions.
Fedi raises the bar a bit, however, as opposed to Cashu’s architecture which uses a single, centralised, entity to act as the mint or bank which issues the E-cash, Fedi is employing Fedimint, a protocol for federated Chaumian E-cash mints.
Fedimint leverages a consensus protocol, which allows separate Chaumian mints known as “Guardians” to act in concert. The consensus mechanism is asynchronous, and Byzantine Fault Tolerant. Even if some members of the federation go offline, the federation can still function. It’s resilient due to its decentralisation.
This means the Guardians in the federation can ensure that no single bad actor can take advantage of user funds. Guardians work together to hold user funds held in custody in a multisignature wallet, which protects user funds. Guardians are responsible for deposits and withdrawal of Bitcoin to and from the mint, and they also issue and redeem E-cash, as well as backup user accounts, and assist users in account recovery.
How Does Fedi Work?
Fedi and Fedimint provide a custodial wallet user experience, although due to Fedi’s federation of trusted Guardians, the user has some protections against bad actors stealing or mismanaging custodied funds. It is a custodial model with some safeguards, so it doesn’t rely only on blind trust.
Chaumian E-cash uses blinded signatures to issue and redeem the E-cash. This means a mint can keep track of the total amount of Bitcoin which has been deposited with the mint, and the total amount of E-cash which has been issued and not yet redeemed.
The mint does not know a user’s account balance, who E-cash has been issued to, who has redeemed an E-cash note, or any of the E-cash note’s transaction history, at any point, between issuance and redemption.
Fedi also improves Bitcoin’s scalability, as economic activity can be pushed off the base layer blockchain with its limited throughput. In Fedi, users deposit their funds in BTC and receive E-cash in turn. All transactions with E-cash are instant and very cheap or free, within the mint.
This E-cash can be spent within the mint with any other user of the mint, or via Fedi’s Lightning Network integration, spent anywhere outside of the mint, via the Lighting Network gateway. Through this gateway, a user can send a payment from within the mint, which is instantly converted to a Lightning payment. Users from one mint can also transact with users of another mint using Lightning Network as the underlying payment rails, as well.
Fedi’s communal custody and spending traits make it a great way to scale Bitcoin as each village, church, neighbourhood, or online community could potentially set up a mint for their members, which could contain the economic activity of all members.
When they need to make a payment to someone outside of the community mint, they could take advantage of the Lightning gateway to pay anyone, anywhere, that accepts Lightning Network payments, or even make a payment to a member of another mint.
What Kinds of Things Does Fedi Make Possible?
Fedi makes Bitcoin accessible for billions of non-technical people who have no idea how to safely and securely store their Bitcoin. The majority of Bitcoin users typically store their BTC custodially, and utilise custodial wallets. This leaves them open to theft, mismanagement, having a payment blocked, an account frozen, and other potential side effects of letting someone else hold your money.
Fedi is a custodial solution, but due to its federation of mints, there are checks and balances in place to prevent many of these negative consequences of custodial services. This means Fedi provides the same “worry free” user experience that custodial services provide, with less of the ways that they can backfire.
Apart from levelling the learning curve, Fedi as a layer two technology, could also be used to issue Bitcoin-backed tokens and assets, tokens like stablecoins, or even altcoins. Die hard Bitcoiners theorise that E-cash’s qualities may make other tokens obsolete, but many are excited by the prospect of bringing tokenisation to Bitcoin, and several projects like RGB and Taro are working on making it a reality. Fedi could help fill this niche, if there is a demand.
Since Fedi is not a blockchain like Bitcoin or Ethereum, it is not limited on what can be built on it. Fedi could allow for smart contract-like transactions and programmable spending conditions. This means we could see Decentralised Finance (DeFi) style use cases for Bitcoin via Chaumian E-cash. Things like Decentralised Exchanges (DEXs), lending, and marketplaces could be trivial to implement on Fedi’s layer two.
Apart from these exciting possibilities, we may see new and varied use cases emerge from adoption of Fedi in the wild. Fedi has been created as a way to make Bitcoin adoption easy and accessible . Fedi has been predicted to be most useful in emerging markets, and other places where bridging the technical gap may be the key to providing financial inclusion to the unbanked.
Projects like Fedi, Fedimint, and Cashu may be the primary way the next hundred million people onboard and make their first Bitcoin transaction. The communal aspects of wealth management, protection, and privacy provided by Chaumian E-cash projects like Fedi and Cashu, just may be the spark that ignites hyperbitcoinisation, in earnest.