Fedi raises $4 million to scale Bitcoin custody with Fedimint

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Fedi Inc. announced on Tuesday that it raised $4.2 million in a seed round as the company seeks to onboard more Bitcoin users with the Fedi app, according to a statement sent to Bitcoin Magazine. .

The app, which the company plans to begin rolling out in the first quarter of 2023, will provide a user interface for Fedimint, an open-source protocol that leverages Chaumian Ecash federated currencies to decentralize bitcoin custody and improve staking capabilities. currency scale.

“Fedi and Fedimint will help put monetary power back in the hands of everyone, everywhere,” Fedi Inc. co-founder and CEO Obi Nwosu said in a statement. “It creates a better future for billions of people 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 jailwhich enhances third-party custody solutions and even some self-guard (first-party custody) setups.

Third-party custody involves trusting family members or friends with the safekeeping of one’s bitcoin in a way that enhances the trust and security models inherent in traditional third-party centralized custody solutions – which are often made up of strangers whose incentives do not necessarily match those of the user.

It is not uncommon for third-party custodians to fail to properly secure bitcoin for a given set of users. Not only is this a risk as this third party represents a single point of failure, but the success of this setup largely depends on the custodian’s incentives to secure user funds. For an outsider, the incentives correspond more closely to the need to profit from custody, blatantly steal, or remortgage the funds rather than methodically ensuring best practices for the security of those bitcoins.

Second-party custody seeks to improve on 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 managers will be those who know the technology and are reliable enough to keep the system running smoothly. Although the concept of trust is foreign to most Bitcoin proponents, the reality is that some might be integrating an aspect of trust into their self-custody setup today without realizing it.

When users hold their bitcoins on their own, they have to make decisions about safeguarding those funds. While they may remain in possession of their hardware wallets or signature devices at all times, the 12 or 24 words may need to be stored to mitigate the risk of loss or theft. In doing so, users must choose between storing them in a safe at home, in a friend’s safe, or in a bank. The latter is likely to be seized by the government as banks must comply with possible subpoenas, while the former is susceptible to $5 key attacks. Leaving the fallback words to a friend can be a good idea if the friend is highly trustworthy – mitigates the seizure – and isn’t as publicly known – to mitigate indirect $5 key attacks. However, this 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 split and each part would be given to a trusted second party. The problem with this, besides the technical complexity of designing such a scheme, is again trust; the user must trust not only each second party, but collectively, that they do not collude against the user and steal their bitcoin. Therefore, even the most sophisticated self-guard setups can include some level of trust.

Fedimint brings this trust hypothesis – second-party trust – in a model that is less technically complex than self-custody and more scalable and private. Here’s how it works.

Chaumian Ecash

As mentioned above, Fedimint is based on Federated Chaumian Ecash.

Chaumian Ecash is the digital money invented by Dr. David Chaum, an early cryptographer who in the 1980s sought to alleviate the privacy issues inherent in the digitization of money – a trend the researcher had planned as digital means of communication began to emerge in his day. . Chaum was concerned about the imminent privacy risks of a digitized currency, where banks would be able to track people’s spending, and the peer-to-peer nature of physical money would be lost.

The issuance and redemption of Chaum’s digital money was still centralized, even though its transactions were P2P. The researcher did not attempt to free himself from government money per se; rather, he was looking for a way to conduct in-person cash transactions online.

Chaum Money used cryptography to allow a user to deposit money in a bank and receive an “I Owe You” (IOU) banknote that could be traded between other people. This banknote promised its holder X amount of money to be redeemed by the bank at any time – a concept popularized by banknotes of the gold standard era. Considering the not-so-great divisibility and transportability of gold, IOU gold banknotes allowed easier transfer and transportation of “gold”. Likewise, a holder of Chaumian Ecash could exchange it for real money at the bank that issued it.

Chaum’s model was of course based on the reputation of the bank. Customers transacting with this bank’s acknowledgment note should have confidence in the bank’s ability to honor the contract stipulated by this note. Otherwise, customers would see no value in them and would therefore completely forego transacting on these notes.

On the privacy side, Ecash de Chaum used blind signatures, a cryptographic trick that prevents the bank from knowing who the note belonged to. Without it, it would be trivial to link a user’s identity to a given note.

The example given by Chaum himself to illustrate this concept was based on carbon paper envelopes. The user can obtain a blind signature – a signature on something the signer does not know the contents of – by placing the data they wish to sign inside the carbon paper envelope and sealing it. The signer could sign the envelope themselves and, due to the carbon paper, the signature would “leak” to the data and sign it as well.

With Chaum’s blind signature protocol, the depositor would send blind data to the bank. After receiving the blind-signed data, the depositor could lift it, allowing them to transfer it by giving it to another person. After a certain number of transactions, this note could at any time be reimbursed to the bank for the corresponding amount. At the time of reimbursement, the bank would be able to check whether it had already signed this data and whether it had already been reimbursed or not, verifying the validity and protecting against double spending.

Federated

A federation improves the centralization of Chaumian Ecash. This is what enables decentralized custody and therefore also enhances the most popular third-party custody solutions in the Bitcoin ecosystem.

A federation is a technical configuration formed between multiple parties with a multisignature Bitcoin address. A multisignature, multisig for short, allows funds to be locked in a Bitcoin address which requires a minimum amount of those parties to agree before transferring funds. In practice, it works by requiring multiple signatures – hence the name – so that funds can be released and moved. Common multisig configurations include 2 of 3 and 3 of 5; in the former, three signatures make up the setup in total and two are required to move the bitcoin, while in the latter, three signatures out of a total of five are required before the BTC can be spent.

Multisignature ensures that a custodian doesn’t go rogue and spend the bitcoin they hold on behalf of the user. The user still has to trust the custodians collectively, but the resilience of the system is increased because multiple people the user is supposed to trust in real life would have to collude against the user to steal their funds. This is why the use of known and trusted parties to form the federation is essential.

Additionally, the multisig also ensures that IOUs issued by the federation are also multisig, requiring the same quorum for the movement of funds and meaning that a custodian cannot create an IOU on their own.

The answer to scaling Bitcoin’s private custody?

put it all together, Fedimint operates a decentralized trust system to enable Bitcoin users to form communities with friends and family, where monetary transactions are cheap, fast, and anonymous, and custody is simplified and enhanced.

Users can join a Fedimint community by depositing bitcoins into 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 similar to Chaum’s blind signature scheme allows the federation to verify that the sender has not double spent those tokens. After a successful exchange for new tokens, the recipient marks the transaction as complete.

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