What is Fedimint and second-party custody for Bitcoin?

Fedimint addresses a significant attack vector of the Bitcoin network: centralized custodians, such as exchanges holding keys to large amounts of its customers’ bitcoin. The world needs to look no further back than FTX for an example of such a custodian’s multi-billion dollar loss.

Fedimint claims to offer a “second-party custody” solution for Bitcoin. That wordplay refers to one’s friend or relative, instead of an otherwise corporate and impersonal third-party. Fedimint also aims to provide greater privacy in transactions using so-called federated Chaumian mints.

So, how does it work?

From Chaumian mints to Bitcoin Fedimints

A Chaumian mint is a cryptographic discovery from the 1980s. These mints use blind signatures, offering appealing privacy properties. Specifically, Chaumian mint operators don’t know the numbers, identities, account balances, nor transaction histories of other users.

Transactions inside a Chaumian mint are unusually cheap and scale to nearly limitless throughput.

In 1982, cryptographer Dr. David Chaum described such a system that used digital signatures to confirm the validity of transactions without knowing the identities of users. As a thought experiment, he imagined a bank-like mint which simply verified that users correctly signed a digital message when they wanted to withdraw their money.

• The system came to be known as Chaumian electronic cash, shortened to Chaumian ecash.
• By the 2010s, the Bitcoin community became interested in one application of Chaumian ecash: federated mints.
• Eventually, technology company Fedi became the lead promoter of the technology, renaming federated Chaumian mints to Fedimints.

In general, Fedimints are still in development. Few Bitcoin users entrust significant funds to their Fedimints while developers continue building modules and fixing bugs. Its wiki says most of the core elements are already in place.

However, user-friendly applications and vulnerability testing are still needed.

More bitcoiners are asking: What is Fedimint?

The lead promoter of Bitcoin Fedimints has recently offered new developer bounties. It aims to reward creators of modules with real-world benefits. Without specifying what the modules should be, it did make a few suggestions, such as a communal savings or spending pool.

Fedi co-founder Eric Sirion and Bitcoin developer Casey Rodarmor spoke about Fedimints at the Bitcoin 2022 conference. Rodarmor described Chaumian ecash as “a nice improvement from a fully centralized, non-private system.” He thought a federation was an improvement.