Bitcoin Fedimints Trade Privacy For Trust And Custody – Bitcoin Magazine
Listen To The Episode Here:
P: What other things in the Bitcoin space, whether it’s companies that are starting up or new protocols that are being proposed that have got you guys really excited, that we haven’t talked about so far in this conversation. Ben, you wanna go first since you’ve been quiet for a while?
Ben Carman: Yeah, I think Fedimints is probably one of the biggest things that’s happening now in the space. It’s pretty cool. It’s like using this thing called a Chaumian Ecash server, the properties of it are it’s perfect privacy, but fully custodial. It’s funny, because it’s something that was invented 30 years before Bitcoin was, and initially some banks used it, but it either shut down or just failed.
Then it was just like, “Oh, this is a cool idea, but failed in the fiat world. Now, people are trying again. because they can make these Fedimints interoperable between each other, where you can have multiple banks that talk to each other through Bitcoin and it’s all bitcoin denominated, but you still can have this perfect privacy on top of it.
I think it’s gonna be a really cool solution. I know another way to do privacy on Bitcoin. It will be custodial, but I think the idea is a Fedimint, so it’s a federation running it. So it’s a lot harder, you can’t just have one person rugpull, you would need to be a collection of people. If you make it sufficiently large, it should be safe enough for amounts to keep on there for privacy.
P: Love it.
Tony Ronning: I agree. Fedimint man. From a privacy standpoint, I think it’s really exciting. Yeah, there is a custodial aspect, but I think, even myself, like I’m not gonna be using it because I’m not capable of custody. Like I want to use the spending money that I have and the daily spending and receiving that I may do on a mobile wallet. I want that to be as private as possible. Even with Lightning, even with PLN how I described it earlier, there’s still Lightning channels; there’s still being online. There’s still liquidity issues receiving: You need inbound liquidity to receive on Lightning, so you need channels open and then you need all these other things. It’s not practical from an everyday standpoint, in a lot of ways and for everyone. So, if I want a Lightning wallet that works really well and Fedimint actually integrates with Lightning incredibly well. You can bounce between federations by just going through Lightning.
All kinds of amazing things you can do with just their Lightning integrations. They basically have Lightning gateways that are attached to the federation, so that a Lightning gateway will honor the tokens from the federation that’s attached to and through that mechanism, you can basically receive on Lightning atomically.
The Lightning gateway will accept the funds on your behalf and you’ll receive tokens for them. These Fedimint tokens and the Lightning gateway can’t just run off with your funds. Sure, the federation, if it was all a majority bad actor, you may lose some funds there.
You’re trusting the Federation, but to me, I would, I’m fine with trusting the federation with a month’s worth of spending money. I’m talking about, like a few thousand dollars worth of spending money at a time to be able to receive the privacy guarantees that Fedimint provides.
So to me, that’s an acceptable risk. You’re not just trusting them with your privacy too. Like you can go to Coinbase, and Matt Odell likes to talk about how some people will just pay him through Cash App and then that way Matt doesn’t see their Bitcoin wallet. He just sees that it’s coming from Cash App.
He doesn’t work at Cash App. He doesn’t have Cash App’s data. So he can’t see the users hiding amongst. They’re trusting Cash App with their privacy. That way no one can analyze their data and their transactions, but with Fedimint, you’re not just trusting Fedimint with your privacy. They literally don’t know what your transactions are; what your Bitcoin are. They gave you a token at some point that’s blinded, so when you go to spend it later, they have no idea if that’s still you or not. Most they can do — and you can do Fedimint in all kinds of different ways — but even in the scenario where it’s a KYC-based federation, which I’m sure will exist and there will be non-KYC ones and KYC-free ones and stuff like that. Even if you’re just a single identity at a federation and you’re receiving these federation’s blinded tokens, the worst they can do is just see how many tokens you have ever received, but they won’t know how much you currently have. They won’t know when you’ve ever spent it, where you spent it.
There’s a lot of beautiful privacy benefits to using Fedimints, but it’s not just trusting them with your privacy, it’s trusting them with custody, but it’s got some really great privacy guarantees.