Bitcoin is a decentralised network that allows us to transact using purely digital money. It has the potential to revolutionise the way we think about money, saving, payments and commerce. It is not controlled by any central authority, and it can be used to send and receive payments anywhere in the world without the need for a third party.
But these attributes cannot be enjoyed by everyone if the network doesn’t scale along with having products suited to different users, use cases and needs. The Bitcoin blockchain has clear limitations, and without scaling solutions, it will never be able to support a global market in its current form.
Today we have second-layer solutions, helping move transactions off-chain in the form of Liquid and the Lightning Network, which both make certain trade-offs to improve throughput and provide users with alternatives.
While Liquid and Lightning were the first out the gate, there are many more layered solutions in the works, like Chaumian eCash with Bitcoin as the underlying asset.
Fedimint is one such eCash implementation; it is a protocol or, rather, operating system that allows users to create and manage their own federated servers. These servers can be used to store data, run applications, and provide services.
What is Fedimint?
Fedimint is a federated Chaumian e-cash system similar to the consensus model of the Liquid Network. A Fedimint federation is a group that jointly controls a Bitcoin multi-sig wallet and enforces certain rules on the funds inside and is represented as a balance on-chain.
Since Federations are built on muli-sigs, they can also establish Lightning channels, allowing funds to flow into a FediMint from both the Bitcoin base chain and Lightning Network.
It is a distributed system that allows users to mint and spend e-cash notes that are backed by Bitcoin. Fedimint is designed to be privacy-preserving and censorship-resistant. Mints are blinded, so individual users or federation members do not know the balances or the identity of users.
FediMint still uses a private key as the primary form of wallet ownership, claiming funds and signing transactions. But instead of the funds being held in your custody, it’s held with a federation of different members, but you still have permissionless access to the funds.
FediMint also offers a type of KYC for certain federations where individuals can provide social proof of their fund ownership, should they ever lose their keys.
FediMint allows users to custody with one or several mints from within their wallet software, so you need not trust any single federation. FediMints’ goal is to create a bridge between custodial Bitcoin and full self-custody, offsetting some of the pain and cost of managing your funds in a non-custodial manner but still offering you access to the Bitcoin base chain and Lightning transactions.
FediMints’ unique custody model is not the only thing it has going for it either. FediMint does not have a blockchain, and its modular nature allows it to perform more complex transactions and financial services that Bitcoin cannot offer in its current form. When combined, Bitcoin and Fedimint can be used to create new financial modules that can benefit grassroots communities.
How does Fedimint work?
Fedimint works by using a network of guardians to custody user funds instead of having a single company, business or individual managing funds. Guardians are trusted individuals who agree to follow the Fedimint protocol and keep user funds safe, not that they cannot collude but steal funds.
Guardians are responsible for managing funds, minting eCash and destroying it as deposits and redemptions flow in and out of the mint.
When a user wants to mint an e-cash note, they submit a request to the guardians with a Bitcoin transaction. The guardians then mint the note and send it to the user. When a user wants to spend an e-cash note, they submit a request to the guardians. The guardians then verify the note and send it to the recipient.
What is a Fedimint module?
A Fedimint module is a software application that runs on top of the Fedimint protocol. Consider the Smartphone you have in your pocket right now; it has an operating system which allows developers to build on top of it and provide you, the user, with added value. If you want to add new features to your phone, like finding out what the weather is, adding encrypted notes on your phone or editing photos, all you have to do is find a compatible app that provides those features.
Think of Fedmint as the operating system on your Android or iOS device; it offers anyone the ability to create a federation, that’s the stock standard version of the operating system. However, Fedi also allows anyone to build financial applications that are compatible with all federations that utilise this module.
If you’re running a federation and you find your members require a certain feature, you could install this module and offer these features to your members. If not, they might migrate some or all of their funds to federations that do offer them the features they want.
Modules can be used to add new features to Fedimint, such as:
What are examples of Fedimint modules?
If FediPool and Stability Pools still haven’t helped you make heads or tails of the modular nature of FediMint, here are some examples of Fedimint modules that could be created to service certain users.Â
FediLayBy
Before the proliferation of credit, many stores offered the option of lay-by. When you purchase goods ‘on lay-by’, the seller will keep those goods for you for up to six months while you pay off the price in instalments. Once you have paid the price in full, the seller will give you the goods.
Today many stores opt for credit, which makes goods more expensive.
While stores that would have offered lay-by refuse to do so either because they don’t wish to manage cash balances due to complexity or trust issues or they don’t want to deal with added banking fees with the additional transactions it would create.
FediMints could bring back cost-effective lay-bys where federations made up of stores could offer customers the ability to purchase goods on lay-by, be that in fiat or Bitcoin; once they reach the amount required, the contract is closed out, and the goods are released.
FediFutures
A futures contract is an agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future. While futures have garnered a reputation as a vehicle for speculation, it does play a role in improved capital allocation.
As an example, farmers use futures contracts to secure a price and to, protect price risks and ensure a steady flow of income. A maize producer may decide to sell a maize futures contract in May, after planting is completed, for December delivery.
Futures as usually reserved for large producers, but it doesn’t mean smaller farmers or retail stores couldn’t benefit from this practice. Regional federations could set up their own futures markets for different commodities and allow different businesses down the value chain to secure produce or raw materials based on their working capital and run more efficient operations versus trying to match income with spot purchases.
Considering the volatility of Bitcoin, futures can also be a great way for individuals to turn that volatility into additional operating capital by securing futures for produce or raw materials.
FediFunding
As a 3rd world bro, I’m constantly hearing the narrative that we need foreign investment; without it, we’re never going to develop our economies, and yes, to an extent, this is true, but foreign investment only goes into certain industries and are willing to invest at certain scales based on the risk.
Investing in a profitable business that only requires a fraction of funding is not appealing to investors, and entrepreneurs are forced to look for funding through banks who don’t see these loans as worthwhile or the credit terms are exorbitant, either pricing the entrepreneur out or forcing them to increase prices to service the debt.
I believe small businesses in the 3rd world fall into this category, and there is an opportunity to help them with local funding. There are plenty of individuals who are sitting on cash savings in informal communities who aren’t willing to put them in the bank and hold them as cash or in a stokvel.
This cash is starved of yield, eaten away by inflation; it could be moved into Bitcoin, or better yet, attracted into Bitcoin as working capital through a funding mechanism. Local business owners could approach Federations and motivate for funding to start a business, upgrade a business or expand a business.
Only those who have capital available for a certain duration, knowing they won’t need it for that lock-up period, would participate in taking on the risk of getting yield.
If enough users transfer funds into the federation funding account (like a GoFundMe), and the project is funded, the funding can be released to the business, and they are now responsible for paying back the funding over an agreed-upon period.
If successful, funders would net a return on capital but also gain a new business in their community that employs others brings goods and services to the area and improves their way of life. FediFunding doesn’t bring in fresh capital into the area but allows community members to use their collective savings and deploy it at different scales to drive meaningful change where they remain the stakeholders.
It also fosters a culture of investing and entrepreneurship.
Bringing financial tools to the unbanked
Fedimint has the potential to bring financial tools to the unbanked since you can build innovative contracts that are not limited by the blockchain, block space or on-chain contracts. I know it’s a tired trope, that Bitcoiners have been shilling for some time, but perhaps this time is different.
The system is not designed to replace self-custody but to bring Bitcoin to more people, to make it accessible to anyone with a limited internet connection and limited resources, regardless of their location or financial status. Fedimint can help people who are unable to access Bitcoin on-chain as they get priced out but don’t have the technical ability or finances to run a Lightning node.
Fedimint is still under development, so we cannot say for sure how people will adopt the system, who will use it and if it will be used as intended, but it does seem to have found a gap in the current Bitcoin ecosystem where many are falling throw the cracks.
Do your own research.
If you want to learn more about federated eCash on Bitcoin, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research other sources, and you can start by checking out the resources below.
Are you investing in the Bitcoin ecosystem?
Do you invest in Bitcoin? Do you maintain stablecoin balances? How do you deal with having one foot in each ecosystem?
Let us know in the comments down below.
