WBD551 Audio Transcription

Fedimint & the Future of Bitcoin Custody with Obi Nwosu

Release date: Thursday 8th September

Note: the following is a transcription of my interview with Obi Nwosu. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Obi Nwosu is a co-founder of Fedimint and a board member for Jack Dorsey’s and Jay-Z’s ₿trust. In this interview, we discuss how Fedimint builds upon various innovations to create community Bitcoin banks, with the aim of fully realising Bitcoin’s potential to bank the unbanked.

“Most of the solutions that I’ve seen around custody take us from A to B to C, so they’re better custody, they improve upon where we are. But what we did is look at what does the world look like when everybody’s using Bitcoin, when there are billions of people using Bitcoin.”

— Obi Nwosu

Interview Transcription

Obi Nwosu: Why is…?

Peter McCormack: We always have Schiff up there!  We had 60 people at the meetup, the first one in Bedford.

Obi Nwosu: 60 people?  Wow!

Peter McCormack: At the meetup, yeah.

Obi Nwosu: BTC Gandalf was there, I think.

Peter McCormack: He was there, yeah.  He drove down the night -- he was like, "I'm thinking of coming".  I was like, "What, from Scotland?"  He was like, "Yeah, I might just drive down".  He did.

Obi Nwosu: My God!

Peter McCormack: So, we just signed this lad.  Two minutes into his league debut for us…

Obi Nwosu: He'd just arrived?  OMG.

Danny Knowles: It was a bit jumpy, that.

Peter McCormack: Yeah. 

Obi Nwosu: That's how to arrive.

Peter McCormack: We had nearly 300 people there.  Last year, we were getting like 40.

Obi Nwosu: And who was the other team you were playing against?

Peter McCormack: Rushden & Higham.

Obi Nwosu: And they…?

Peter McCormack: They were a couple of places below us last season.  But we're so much stronger now.  I mean, that guy there, Dan Walker, we signed from Beds Town.  They won step 4 last year.  So, he's a proper good player.  I mean, they hit the bar but --

Danny Knowles: It was comfortable, wasn't it?

Peter McCormack: Yeah, we could have had six or seven.

Obi Nwosu: And what's the plan in terms of getting to Premier?

Peter McCormack: I mean, I think people took that too seriously!  I mean, the plan is to get into the league, the football league; that's the plan.  It's based on two things: you've got to get a crowd down; either my Bitcoin needs to massively increase in value, or I need to keep convincing Bitcoin companies to sponsor it.  But I think momentum is everything.  I think if we're crushing it…  We should win the league, we're the best team.  If we're top of the league by February next year, I can go back to all the sponsors and say, "We delivered".

Obi Nwosu: Okay, but you need sponsorship to go into the league; you can't just, at the top, you automatically go in?

Peter McCormack: Look, we're a nothing club.  The only people who would come last season would be people who their family played for the team; now, we're building a community.  But 300 people coming to a game will make you maybe £2,000; at two home games a month, £4,000.  You save half of that for running the club.  That gives you £500 a week wages.  It's hard to compete on that.  We've got the best budget, which is £1,500 a week wages, but the only reason we can pay that is I've got good sponsors.  On top of that, we put in a new irrigation system, £20,000; we've taken on a ladies' team, we've bought them all new equipment, tracksuits and kit, we spent £20,000 on that; we've taken on a youth team, we spent £10,000 on their stuff.

So, all the money the sponsors have invested is essentially us, like a start-up, out of the gate running, taking on the biggest women's team locally, taking on the youth team, sorting out our ground, sorting out our signage, sorting out our merch, getting our website sorted, having a videographer to do it.

Obi Nwosu: It is basically like setting up a company.

Peter McCormack: Totally.  But the difference with this, it will never scale to the point of exponential growth in terms of revenue.  What it most likely does is get to the point where it's sustainable.  So, if we can get into the town centre and play our games at the Rugby Club, our crowd will probably go from 300 to maybe 800, 900.  Then, at this level, our income would allow us to have the best budget in the league, and you've got to keep growing that through the leagues.

But I think we'll always need sponsors or people like Cameron and Tyler Winklevoss who I can say, "Give me some money" to make us do it.  But we do have a Bitcoin meetup, which had 60 people come to it.  We're about to teach all our players about Bitcoin; we're going to put QR codes on their social media cards, so if they score a goal, it goes up and they get tips.  There's a buzz around this town, and in some ways this could become like an El Zonte kind of thing, in that we create this sporting local community that's all around Bitcoin, and it spreads the knowledge.

But it only works with sponsors.  No, we can only launch with sponsors.  Give us five years, we might become sustainable, because we have a buzz and a crowd in the town.

Obi Nwosu: And people will come for it, yeah.

Peter McCormack: Yeah.  But we've spent £200,000 pre-season on getting everything ready.  Our streaming, it costs us £60,000 a year to stream all the games.

Obi Nwosu: £60,000?

Peter McCormack: Yeah, because it's about £1,500 a game, because you have a commentator, three cameras, instant replays, all that kind of stuff to do it right.  But because of that, we have a few hundred tuning into each game, which hopefully will become 1,000.  They'll also buy merch.  But clubs at our level cannot do this.  We operate, honestly, I think the standards of what we're trying to do, a lot of the levels are crap Premier League, good Championship, in that we do a printed programme that's nice, our website is the bollocks, we're trying to do everything top level.  But we can only do it because we've got the money.

Obi Nwosu: Yeah, but I think, with everything, if you start with passion, you're really passionate about what you do, then you can figure everything else out.

Peter McCormack: Yeah, and we're doing good stuff.  The other big, local team, they gave up the ladies' team, they just didn't look after them.  We're like, "Well, that's ridiculous.  You've got to have ladies' football as part of this", so we've taken them on.  And the game, what would you say the mix was, women to men, on Saturday?

Danny Knowles: It was higher than I thought.  It was like, I don't know, 60/40 maybe?

Peter McCormack: Yeah, 60/40.

Obi Nwosu: 60/40 men?

Peter McCormack: 60% men, 40% women and girls, yeah.

Obi Nwosu: That's pretty good.

Danny Knowles: But it was like a family event, wasn't it?

Peter McCormack: Yeah, and if you think, the girls just won the Euros, it's good timing.  Anyway, the plan isn't the Premier League; the plan is the Football League, six promotions.

Obi Nwosu: Step by step.

Peter McCormack: Step by step, hopefully in six seasons.  Anyway, man, how are you?

Obi Nwosu: I'm really good.  I was enjoying walking along the river in Bedford, very relaxing.

Peter McCormack: It's beautiful up there, right?

Obi Nwosu: With the swans and everything, it was nice.  Thank you for the recommendation on where to stay.

Peter McCormack: The Embankment?

Obi Nwosu: Yeah, The Embankment.

Peter McCormack: It's the best put in town.  Got to get Danny up there at some point, but it's a really nice part of the town.  I love it, I love my hometown.

Obi Nwosu: I can tell; you're really passionate about it.

Peter McCormack: Bedford maximalist!  So, last time we spoke was a while back, you were at Coinfloor.

Obi Nwosu: Yeah, it was less than two years ago, but it feels a lifetime ago.

Peter McCormack: Now you're running the hottest start-up in Bitcoin, everyone's talking about it.

Obi Nwosu: We had an incredible launch, we're really humbled by the reception, but yeah, it's so amazing the people I work with.  I just love it every day.

Peter McCormack: How did that transition from Coinfloor to this happen?

Obi Nwosu: So, Coinfloor, the last couple of years, I became aware of the fact that I wanted to do something else.  Coinfloor was great, it was a great experience and we had a number of firsts, but it was very focused on the UK and right from the beginning, I'd been very interested and passionate about bringing Bitcoin to the world, starting with the Global South.  And with traditional finance, VCs and investors, the idea of your second market being Nigeria or Venezuela was just not going to happen.

Also, at the same time, in 2019, the Financial Action Taskforce approved the travel rule, and from being one of the first regulated exchanges in Gibraltar and Europe, for me it was very clear that over the following three to six years, we were going to see the situation for people being able to take their Bitcoin off exchanges get more and more difficult.

So, I decided at that point, I wanted to find ways of getting people off exchanges, because at the stage, already 90% to 95% of our users would keep their money on exchanges, even though we were trying to get it off, almost begging them to take it off.  And, that situation was obviously getting worse as the regulation became worse.  At the same time, I started also looking at ways to find people to purchase Coinfloor, who had the same philosophical leanings as I did; and, that's where it started.

Over the following year, I went to Hackers Congress Paralelni Polis in Prague, and I was fortunate enough to meet now one of my co-Founders, Eric Sirion, and yeah, he was explaining this idea, called federate chaumian mints.  I was explaining some ideas I had about getting people off exchanges.  He politely told me that most of my ideas were terrible, but in a very polite way, and then he explained this federated chaumian mints idea.  From his point of view, it was a privacy solution, and it was an incredible privacy solution. 

But from my context, in terms of trying to get people off exchanges, and my consciousness of the Global South and especially West Africa, I realised that this was something much more.  It was a new form of community decentralised custody.  So, instead of being your own bank, you could be your own community bank, and it stood some way between the Bitcoin standard of self-custody, and then this situation where we were at now, where most people were holding their money on exchange, and this was a really interesting middle ground.

Peter McCormack: Yeah, it really stood out to me after I'd been out to El Salvador, because visiting El Zonte a few times, watching people collect their Bitcoin when they had these community events and then seeing them go back home, and I was starting to think about custody for these people, because I obviously have a multisig custody solution, cold storage for myself, which involves distributing keys into multiple locations, and certain access rights, etc.  But it's very much a developed western solution.

I was thinking, "This person's going back to a place which is essentially like a constructed shack of sorts", not that I'm being derogatory towards it, it's just the reality of their situation.  I was thinking, "Well, how does this person self-custody?  They have a phone.  Can they afford a hardware wallet?  If they can, where are they hiding it?  If they're going to back up their private key, again, where are they hiding it?  If they're going to do multisig…"  I was just like, "This doesn't work".  Somebody like Casa has a multisig solution that's great if you're in a developed western nation and you can afford it, and at the time, I was just really struggling.  We'd talked about it on the show and I didn't know how it was going to be solved.

Once I heard about these federated mints, I was like, "Hold on a second, this is a potential solution for these communities".

Obi Nwosu: Yeah, I think for some people, it could be this process of graduation to self-custody.  But I think the thought process was, right now we're at point A and we want to get to point Z, or Zee for the US audience!

Peter McCormack: It's Zed!

Obi Nwosu: Zed, yeah, you want to get to Zed.  And, Z is hyperbitcoinisation globally.  Now, most of the solutions that I've seen around custody take us from A to B to C, so they're better custody, they improve upon where we are.  But what we did is look at, "Well, what does the world look like when everybody's using Bitcoin; when there are billions of people using Bitcoin?"  And, when you look at that world, a few things become clear. 

One, the vast majority of people will be using Lightning as their daily driver; that's what they'll be using for transactions and so on, receiving and sending; people receiving it for salaries, people will be receiving it as a merchant, and spending money to buy goods and services, as well as holding.  And also, just given the limitations of the Bitcoin Network at the base layer, the majority of people will not be transacting on-chain most of the time, if ever.

Once you realise that and you realise that we're going to go from a world where most people right now have multiple UTXOs to their name if they're holding Bitcoin, to a world where UTXOs will be shared by multiple people, then you need some way of doing that, which isn't holding it on an exchange, because at the moment, the only choice that you have to have that sort of world is everybody storing it a centralised manner with effectively a stranger, someone you don't know, whose incentives, as we've seen time and time again, often don't align with your own.

Peter McCormack: Yeah, or they can make mistakes, or people can hack things, and there's just that risk of holding there; that's why we always encourage people to get their coins off exchange.  But it feels like it's more than just that though, it feels like this is more of a bridge between the fiat world and the Bitcoin world in that, like you say, you be your own bank, but this access to a community bank, it feels like it's a little bit more goal driven, rather than commercially driven.  I know you've raised funds, but it still feels more like you're trying to build wallets, that end solution for, as you said, people using it, the Z.

Obi Nwosu: Yeah, so when I started, when I met Eric, it was and remains and will always remain Fedimint; that is the core protocol, this protocol for what I like to call "the third pillar of the Bitcoin open-source ecosystem".

Peter McCormack: Yeah, explain the three.

Obi Nwosu: So, the first pillar is decentralised, censorship resistant money as store of value; that's Bitcoin itself, and it's almost like this foundational layer.  But the next is decentralised, censorship payments, and that's the Lightning Network.  That gives you a mechanism to scale the store of value to basically, theoretically, an unlimited amount of transactions, if it's a well-structured network.  And what was missing is this decentralised, censorship resistant custody system, so that people everywhere can custody Bitcoin without having to rely on a presumably regulated third party, and that is Fedimint.

Peter McCormack: I know we're going to have to get into the details of how it's going to work, but the thing I was starting to think about is, there's obviously issues from buying from exchange, the big one, something that Matt Odell will smash me over the head and talk about, is issues with KYC AML.  I know you're solving a custody solution, but will people be able to accumulate Bitcoin within a chaumian mint and avoid exchanges totally?

Obi Nwosu: So, I think the short answer is, yes.  What we are trying to do, to your previous question, is think about this solution holistically.  So, custody is a key part of it; payments and settlement through Lightning is a key part of it; and obviously, the money itself is a key part of it.  But we're not just focused on creating a great new form of community custody, we're focused on helping form societies or cities or towns that are hyperbitcoinised.  Just so we have a yardstick, we're defining hyperbitcoinised as more than 50%, so 51% of the community using Bitcoin every day, and that's by using, not including just holding or just investing or just speculating, but buying, selling, using it as a means to transfer other forms of value, like stablecoins, or whatever it may be, every single day.  

When you want to get to that target, it focuses the mind.  So, you have to solve, or have to help promote solutions to the end-to-end process.  So, if that means being able to transact instore in a way that the user's comfortable with, or training them or educating them, that's all part of solving it, so we don't just plonk in a technology, but we provide training and infrastructure, so that they can use it end-to-end, without having to rely on central third parties, if they so wished.

Peter McCormack: And you obviously -- have you done any dev work, or are you still scoping the dev work?

Obi Nwosu: Oh, we've done a lot of dev work.

Peter McCormack: But it's not available yet; you can't create one, right?

Obi Nwosu: It will be available very soon.  So, we're hoping to have a Signet version of the Fedimint software, the aim is in August. 

Peter McCormack: And, do you have a test town you're going to be placing this; is there a test scenario you're working on?

Obi Nwosu: So, we have multiple potential test towns or cities, or countries.

Peter McCormack: Okay.  Is Bedford one of them?!

Obi Nwosu: Bedford, well we can talk afterwards!

Peter McCormack: Well, what's an ideal test community?

Obi Nwosu: We have a series of criteria.  So, we're doing a couple of things.  One, we're going to be rolling out the software -- there's two different things.  So, there's this open-source project, Fedimint, which we're working very hard to maintain its open-source nature, because we want it to be a protocol that everybody uses.  We have a number of incredible donors and sponsors providing and donating sponsorship for that.  Then, we have the commercial company, Fedi, which is working on a wallet, which will be likely the first wallet to implement the Fedimint protocol.

The timelines for those, they're obviously dependent, because we can't roll out Fedi before Fedimint; so, the Fedimint timelines, we're aiming for before the end of this year, ideally within the next couple of months, to announce a version to be used by hackers, enthusiasts, and so on, so we can start kicking the tyres, and anyone can download that.

Peter McCormack: What's the relationship between the two; are they essentially two separate entities?

Obi Nwosu: They're two separate things.  So, it wasn't until a few months ago that we really started looking at Fedi -- you can call it Fed-i, because it sounds like Jedi!

Peter McCormack: It sounds like the Fed.

Obi Nwosu: Well, some people say that, but that's just coincidence.

Peter McCormack: Be your own Fed!

Obi Nwosu: You can be your own Fed, yeah.  So, Fedimint has been worked on as an open-source protocol.  It is the actual decentralised custody system.  It's run by members of your community, trusted members of a community, so each person will run a server, and they work together to run, one, to manage a multi-signature wallet for any Bitcoin that's deposited to it; and also, to manage this federated chaumian mint, which effectively creates these IOUs for the Bitcoin, that can then be held by you on your mobile app, or viewed and accessed by users.

The chaumian mint is highly private and privacy-preserving.  It's a very mature, old and established mechanism for providing privacy within this sort of walled garden of the federation.  So, that protocol is available and has been worked on for a number of years.

Peter McCormack: Predates your work?

Obi Nwosu: Well, yes, and the idea of chaumian mints predates federated chaumian mints.

Peter McCormack: Of course, yeah.

Obi Nwosu: Prior to my meeting Eric, he'd been working on that for over a year and was being sponsored by Blockstream.  The idea originally came about, I'd like to say, a bit like Bitcoin.  There were a number of different things that preceded it, sometimes by decades.  But it finally got to a point where all of it was available for the idea to appear.  When it did, a few people tried to work on it in parallel.

So, if you look at the constituent elements, first of all, in 1983, we had the ideas behind chaumian mints and blinded signatures by David Chaum.  He was one of the people referenced in Satoshi's whitepaper.  And this was the leadup to the idea of chaumian mints, so the privacy-preserving protocol, but it required money, cash, to be sent to a centralised entity, a bank; he posited it would be a bank.  You send them cash, fiat cash, and they would give you these IOUs for that cash.

Peter McCormack: So, trusted.

Obi Nwosu: So, it was trusted, well the money was trusted because it used fiat, because Bitcoin didn't exist.  Also, the actor was trusted as well, one, a central actor at the bank; but others, you trusted one person and you trusted the money.  But ignoring those two points of trust, you had within the walled garden of the chaumian mint, you had cryptographically and theoretically perfect privacy.  1989, I believe, he launched DigiCash, which was implementing a chaumian mint and he worked, partnered with banks, to receive money, and then they would implement the system.  That shut down at the end about ten years later. 

Fast-forward to 2008, 2009, whitepaper and then the launch of the Bitcoin Network.  So now, for the first time, you had a money where it could be owned by multiple people, because up until that, we cannot all take, or manage, access to a dollar note.  We're all holding it in our hand and paying; maybe we could, but it's not very practical.  But you can do that with Bitcoin, because you have the concept of multi-signature wallet addresses, so multiple people can take ownership.  So that again was a big milestone, and it's also immutable privacy-preserving, meritocratic money.  So, you now have the potential of the money being replaced by fiat.

Then, fast-forward, 2016, 2017, Blockstream's Liquid Network was launched, and that gave us the ability to effectively have multiple people working together to perform some sort of programming task.  Effectively, it's similar conceptually to multi-party computation, but it's actually different; but the idea you can work together to coordinate to perform a task.  So, once that came out, you had all the constituent elements. 

Within months of that, Eric and two other, I believe, cypherpunks, hackers really, accomplished programmers, who would often meet in places like Paralelni Polis Hackers Congress and so on thought, "How can we combine these elements?  Maybe let's combine chaumian mints, but instead, you swap out the fiat with Bitcoin and the ability for multiple people take access to Bitcoin; and then swap out one bank with a federation", because Liquid came up with the idea of federations, "but a federation of people working together, the same people who are holding the keys, also to run the chaumian mint, so we can effectively federate this form of privacy, which is aiming at incredibly strong privacy guarantees".

Peter McCormack: Okay, so can you walk me through how it physically works, the process?

Obi Nwosu: I'll try my best.

Peter McCormack: Try your best.  So, if I'm here in Bedford and I'm like, "You know what, we need a community federated mint, I want to create one", what is it I actually do, in terms of the community I have to build to manage it, and then technically to deliver it?

Obi Nwosu: Yeah, so yeah, let's say you're in Bedford and you've got Danny, yourself -- well, first of all, the first thing you as a community would do is decide who within your community has a track record of being trustworthy.

Peter McCormack: I'm fucked!

Obi Nwosu: So, you may not include yourself in that list!  But people I like to think who prioritise social capital at least as much as they prioritise financial capital, because if you think about the incentives, you're asking these people to look after capital, financial capital.  So, if they prioritise social capital very highly, on a standing in the community and so on, that will probably be a good starting point.  And over your lifetime of being in a community and so on, you're going to have an idea of people who have a track record of just being knights almost, honourable, trustworthy, reliable, etc.  So, you find a group of those and they agree to be what we like to call guardians of the federation.

Being a guardian is, other than just having good character and so on, doesn't require too much, we're going to try and make it as simple as possible.  You're going to need to run a Bitcoin full node and the Fedimint software, the protocol.  So, we're going to work with people like RaspiBlitz, Umbrel, nodl, Start9, etc, to make this really, really easy.  You basically download the software, or you buy one of these devices, and it will be an option there to install Fedimint.

Then you're going to need to, as part of the setup process, and again -- the longest part is syncing the Bitcoin full node.  Fedimint's part is only a few moments more, and as part of the setup, you're going to basically provide what are the IP addresses of the other federation members.  Let's say you found 5 in a village of 500.  So, you put the IP addresses of the other people, and the system will self-organise, connect and set up a federation.

Peter McCormack: And, what is actually created when a federation is created?

Obi Nwosu: So, there are two parts.  One, you will personally set up a public private key for one guardian, if you're one of the guardians, a public private key for yourself and your own part of the multisig.  Once that's done, you will do two things.  You will form a multi-signature wallet by coordinating with the other guardians, and you will also form this sort of almost decentralised service, which is the chaumian mint service, which is able to issue, create new IOUs and is also able to destroy those IOUs, and is also able to convert -- think of it like a software equivalent of a kiosk teller machine.

Think about the example of, you're going to a fairground and there's a kiosk there at the entrance.  When you go into the fairground, there's lots of rides, and so on.  You can give them your cash and they take your cash, and then in this example, they take a piece of paper and they just write a number of notes, different tokens that represent different amounts of money, representing up to the equivalent amount of cash you've given them, and they give them to you.  You can now go around onto rides and you can use them.  If you don't have the right change, you can come back to the kiosk and say, "Can you give me change for this £10 note?" that they gave you, and they can replace it with ten £1 notes, and then give you change as well. 

If they receive a token from you, they destroy that and they create new ones; and if you are leaving the fairground, you can go back with whatever notes you have and you can choose to give some or all of them to the kiosk, and they will look at the total value, destroy them, and then go back to their safe and take some of the cash they have to the equivalent amount and give that to you.  So, those are the things that they can do. 

The elements, in terms of the system, is the safe to store the cash and then a piece of paper and pen and the bin, which gives them effectively the ability to create IOUs and destroy IOUs.  So, those are the two bits that each guardian is managing, the system to create and destroy the IOUs, that's the chaumian mint; and the ability to be part of the multisig that's holding the Bitcoin.

Peter McCormack: So, say we found five people and we created the multisig, do we have a choice whether it's a 3-of-5 or a 4-of-5, and all those kinds of things?

Obi Nwosu: Yeah.

Peter McCormack: And I guess there's no limitation, you could have 20 people, and a 10-of-20?

Obi Nwosu: So, these are implementation things that we're dealing, because we want to balance functionality with performance and simplicity as well.  But fundamentally, there's no reason why there's a limitation.  Logically, you don't want less than four, maybe three, because you want to have a situation where no one party has the ability to block a transaction.  So, the logical minimum of that would be three, so that two people can always make sure a transaction happens.

There's also limitations on the largest number, just from a performance point of view, because the more people, the more coordination needs to happen to sign transactions, or perform any action on the system.  So, although there's no hard and fast limit, it's likely that most will be between 3, 4, 5 on the low end, and 15, 16 to 20 on the high end.

Peter McCormack: So, say here in Bedford I find ten members of the community that I think are upstanding members that we trust, want to do this with, and let's say, I don't know, call it a 5-of-10 for the sake of this --

Obi Nwosu: You probably want to make sure that there's a majority need to sign, so a 6-of-10.

Peter McCormack: 6-of-10.  So, say we have the 6-of-10, what are the things they're having to sign; and is it a manual process each time?

Obi Nwosu: They need to download the Fedimint software, and again it will normally be automatic as part of something like an Umbrel, RaspiBlitz, Start9 model, that sort of system.  And just like the Bitcoin node, this is going to be an unattended operation system.  So, once you've downloaded it and you've put the IP addresses of everybody else and kept the backup of your own private keys, other than running out of hardware space in three or four years' time, something like that, general maintenance or restarting a machine if it fails, which hopefully it won't do very often, just like a Bitcoin node will just sit there and run, you just have to keep it fed and watered with electricity and internet.

38:39

Peter McCormack: Say we create this Ecash for Bedford, because it's essentially an Ecash token that's created based on the Bitcoin, that's the term I've heard?

Obi Nwosu: Ecash is the protocol, chaumian Ecash.

Peter McCormack: Oh, okay.

Obi Nwosu: Chaumian Ecash, yes, and it is a form of IOUs.  But just to avoid confusion, it's still effectively Bitcoin, because you can spend it, the user experience will be like Bitcoin.  But yes, within the federation, it's these IOUs giving access to a pot of Bitcoin that's being held by the group of people.

Peter McCormack: Yeah, I'm thinking in UX, I'm going back to my UX days, thinking of UX.  Say Danny's created and I want to get some of this Bitcoin within this chaumian mint, do I speak to Danny, or is it just a public address I go to and I send the Bitcoin to it, and I get this other token representation back?

Obi Nwosu: So, in the example, you want to receive some Bitcoin?

Peter McCormack: No, I want to use this federated mint.  In the community, I want some of this version of Bitcoin.  Is there just a public address I just send it to, and it immediately sends something; what's the exchange process?

Obi Nwosu: So, what you want to do is join the federation, so let's take it back a step.  So, one thing I didn't go into is the privacy properties of the chaumian mint in that example of the kiosk, but that's a separate issue.

Peter McCormack: Yeah, the whole privacy thing, yeah.

Obi Nwosu: We can come back to that.  So, what you would do is first of all, a federation setup.  So it requires, let's say five or ten people that you trust within this community, they all download this piece of software, and effectively click "run" and put everybody's IP addresses.  Those IP addresses can be in the form of a QR code, and they can scan each other's QR codes and they're setup and run, and once it's all configured and running, it just operates.  As guardians, as long as they keep the machines having electricity and internet going to that, day-to-day that's all they need to do.  All signing, all transactions happen in an unattended way.

Okay, so when they have set this up, all of them will, from the interface, be given the address, the location of the federation that's now been created, and it will probably also show it in the form of a QR code as well.  They then download a Fedimint-aware wallet.  Fedi will be the first, but we're hoping there'll be others, and we're expecting the others will come, just like there are multiple Lightning wallets, and so on; or, existing wallets can integrate the functionality as well.  So, they download, say Fedi, and the guardians themselves will scan the QR code that's displayed on their device, which is the location of the federation, and that's it, they're signed up, they're done, they've become a member of their own federation.

Peter McCormack: And can anyone join any federation?

Obi Nwosu: Anyone can join any federation, yes, because it's cryptographically near perfect privacy, so there's no way to know who can join.  However, if you wanted the people to help with the recovery of your keys in the event of you losing your phone and not keeping all your backups and so on, which is one of the things that frightens many people from self-custody, you would need to be able to show that -- they would need to know who you are to be able to help you recover.  So, that leads to a social limitation, even though there's no technical limitation.  You'd have to just accept the chance that it would be very hard for them to say, okay, a random stranger's come and asked for something back.  So, that leads to this limitation, but it's not a technical one.

So, another user comes along and wants to join the federation, let's say Danny.  He will come up to you and say, "I'm interested in joining your federation".  You'll take your mobile app, you'll click the name of a federation, it will show you the QR code of the federation and they will scan it with their version of the app and they will join.

Peter McCormack: They'll join.

Obi Nwosu: They could potentially, depending on how we want to design the final UX, we could allow only guardians to allow people to join, or anyone who's a member can allow anyone to join.  That's a UX decision that we're deciding.  But let's say anyone can allow anyone to join, then Danny can go up to someone else and that person says, "You know what, you're always going on about this Bitcoin thing.  Okay, I finally get it, how do I get this thing?"  Instead of saying, "Join an exchange", he can instead say, "Here, just download this app and scan this QR code"; done.

Peter McCormack: And, can you imagine people joining multiple federations?

Obi Nwosu: Yes.

Peter McCormack: So, in that scenario, does it require the token within that federation to have its own name?

Obi Nwosu: No, it will always appear as Bitcoin within a federation.  But you should think about if there's an app like Slack, where you have multiple different Slacks you can join, or Discord, multiple different Discords.  And within each Discord, you have different conversations; they're not the same conversation, but they're all conversations.  But there's no way of directly transferring a conversation from one Slack to another.

But this is where the power of either on-chain, or on-network, you don't need to have that ability, because you can instantly, or near instantly, use the Lightning Network, or relatively quickly use on-chain transactions, although we expect multiple people to use Lightning Network to transfer between federations or between federations and other Lightning wallets, because the Lightning Network as a standard allows for the interchange between anything that's Lightning aware.

Peter McCormack: But is it like Liquid; once I put my Bitcoin in there and I get Liquid Bitcoin, it's a different thing, because the Bitcoin's held in a multisig?

Obi Nwosu: Conceptually it's similar, but instead of one Liquid Network used by everybody, there's hundreds of thousands potentially of Fedimints used by communities.  And to send between them, you're not penalised by that, because to send between them, you use the Lightning Network, and so it still just takes a second to send between them or to send out to something that's not within the federation.

Peter McCormack: So, if Danny is in one federation and I'm in another, I can still send him my Bitcoin from my federation to his?

Obi Nwosu: Yeah, and it would take a second, or however long the Lightning transaction takes to operate.  Or, if Danny has a Wallet of Satoshi or a Strike wallet or a Muun wallet or a CoinCorner wallet, or any number of the other Lightning-aware wallets, they could send to you, you could just show him within your interface.  From your point of view, it would look like a Lightning wallet and you would say, "Create invoice", and it would show the QR code. 

He's in Australia looking through a Zoom conversation, or a Keet conversation nowadays, soon, and he can scan it and the payment will be sent over the Lightning Network, so you're not penalised by being within a federation, which is why it works so well with the Lightning Network; it becomes much more practical.  Otherwise, to transfer in and out securely will be, like Liquid, you'd have to wait a number of block confirmations.

Peter McCormack: So, what I'm trying to understand is, the federation's created, and to join the federation I click the QR code; I've been accepted, I'm now in the federation.  Then, I send Bitcoin to an address and that gives me this Bitcoin?  How do I get this Bitcoin?

Obi Nwosu: How do you receive from that point?

Peter McCormack: Yeah, how do I convert my Bitcoin into this Bitcoin?

Obi Nwosu: You would have an app, you would have, let's say, the Fedi app you've just joined, you've scanned the QR and you've joined.  Then you would say, "Create --"

Peter McCormack: "Bedford".

Obi Nwosu: For example, you could say, "Create invoice" and just like with any other Lightning wallet, although we're aiming our user interface to be really, really simple, but it's the same as any other Lightning wallet conceptually, you would create invoice, say the amount you'd want to receive, like 1,000 satoshis, sats, and it would show a Lightning invoice.  Then you would have another wallet, say that's a Lightning wallet, for example, and that's connected to the Lightning Network with your own Bitcoin in it; or, you've got an exchange account that supports the Lightning Network.  It can also do it on-chain, by the way, but I'm just giving a Lightning Network example to begin with.

You would paste in the Lightning invoice, or if it supports scanning, you would just scan the QR code, and then a Lightning transaction would occur, sending the money to this address.  If you don't have a wallet that supports the Lightning wallet and it's a normal wallet, then you would say, "Invoice as a Bitcoin transaction", and it would show you the address to send Bitcoin to, and you would then, within your Bitcoin wallet, send an amount to that Bitcoin address; and after a number of confirmations, it will appear in your wallet as capable of being spent by you.

Peter McCormack: So, that Bitcoin I've sent, I've paid that invoice, does that go into a pool, like into a vault?

Obi Nwosu: That goes into a multi-signature wallet managed by the ten guardians.

Peter McCormack: Yeah, and I get an IOU.

Obi Nwosu: Once it's had enough confirmations to avoid things like rollbacks on the main chain and so on, similar to how Liquid works -- this is if you do it on-chain; that's not required for Lightning -- then, the federation guardians' machines will be following the software, and the software says a number of confirmations have gone by, "Okay, we can create an equivalent number of Ecash tokens we'll forward to you", IOUs effectively, to be used within the system, and make them available to be picked up by the user.

Peter McCormack: Okay, so it almost puts those into a vault and gives me a representation?

Obi Nwosu: So, that's like the kiosk example.  The multisig wallet is the example of a vault, of a safety box behind them, and then the piece of paper and the pen and the bin is the creation and destruction of the IOUs that relate to it.  So, you receive some cash, you put it in the vault, that's the multisig; and at the same time, you then create $1, $1, $5 and two 50 cents, and then you create those and you give them to the person in replacement.  They can use them within the fairground as much as they want, they can pass them around to other people.  Within the fairground, it's a bearer asset, but it acts like cash in that system. 

If they say, "I want to buy this ride for $2 and I've only got a $5 note left", you go back to the kiosk and you say, "Can you give me five $1 tokens instead".  They take the $5 token, destroy it, give five $1 tokens back".

Peter McCormack: Oh, so I have to have exact denominations?

Obi Nwosu: It's like cash.

Peter McCormack: Literally like cash?

Obi Nwosu: It's literally like bearer cash.  It operates the way people think Bitcoin operates when they first hear about it.

Peter McCormack: So it can't do change?

Obi Nwosu: Well, just the way you would do change with normal cash.  You would go to the kiosk and ask for change, you would go to the bank and get change.  So, it's the way we've learnt to deal with physical cash.  Also, you can send it directly between people, because each note is its own thing, or each token or each coin.  But all these things are happening, by the way, to you automatically by the software.

Peter McCormack: Yeah, of course, yeah.

Obi Nwosu: So, when the change is not ready, it will just send a message, "I've got 95% of what I need, a bit's missing", it sends a message off to the mint, and that will destroy that and give you back a set of change in a fraction of a second as you pay.

Peter McCormack: If it's all automatic, that's what I want to know --

Obi Nwosu: Yeah, it's all automatic.

Peter McCormack: -- because I actually don't care about this stuff, because I'm trying to think in terms of the user.

Obi Nwosu: Yeah, from the user point of view, it looks exactly like what they expect.

Peter McCormack: They don't literally go to the machine and say, "I need three $1"!

Obi Nwosu: No, it's all happening automatically, but it's also just what's happening at a technical level, and what's happening at an experiential level; experientially, it will look like a Lightning wallet.  So, we normally use a Lightning wallet which is really simple to use, but sign-up involves scanning a QR code, and that's it.

Peter McCormack: And so, say me and Danny are in the same federation, I send 0.5 Bitcoin to it and I get this 0.5 Bitcoin worth of Ecash --

Obi Nwosu: Yeah, but from your point of view, you've given a Lightning invoice and you've received 0.5 Bitcoin.

Peter McCormack: You said it could be basechain or Lightning?

Obi Nwosu: Yes.

Peter McCormack: So, are we saying it's like Muun wallet, where mine won't know the difference; or, will I actually have a basechain and a Lightning wallet within the Fedi wallet?

Obi Nwosu: So, the final UX --

Peter McCormack: To be decided.

Obi Nwosu: So, there's three different -- because you ask an interesting question there in terms of the nuance.  But there's three different types of transactions, effectively: one is intra-federation, between one federation member and another federation member, and that's Ecash directly, and that's actually at a third layer.  If you say base layer is Bitcoin, layer 2 is Lightning, this is happening in multiple sharded layer 3s.  We have hundreds of thousands of sharded layer 3s effectively, each one being its own scaling layer.  So, any transaction happening within that federation, within that village, within that town, not only does it not touch the base layer, but it doesn't touch the network either, the Lightning Network.

Then you have any transaction between someone within a federation and someone outside of a federation, but over the Lightning Network, so that could be someone who's got their own Lightning node, or someone who's using a centralised Lightning service, or someone who's using one of these semi-centralised, decentralised services, or another federation, someone who's in another federation somewhere else.  All of those will go over the Lightning Network.

Then finally, there'll be transactions sending money out the system to the basechain, or receiving money from the basechain.  Now, the first two, the way we're currently designing the system, they're going to be the most frequent ones, and they will visually look the same.  So, they will both look like Lightning transactions, even if you're sending it to someone else within the federation.  So, the ones that most people will do somewhere between 99% to 100% of the time, they will look the same.

But because the format of a Bitcoin transaction versus a Lightning invoice and the way it works is, a Lightning invoice, the normal modus operandi, is invoice and pay invoice versus address and send money to an address, it might be that the UX for that is slightly different than the UX for sending to a Lightning address, which is what you see on Lightning wallets today; you have a separation between on-chain and Lightning.  But there won't be a third separate between Lightning and federation to federation.

Peter McCormack: But say Danny's not in the federation and I am, and he sends me a Lightning invoice, I can pay that from my Fedi wallet?

Obi Nwosu: Yeah exactly, and vice versa.

Peter McCormack: And so what happens; when I pay that, say it's 1,000, does it burn my 1,000 sats of the federated Ecash and then send him from the centralised?

Obi Nwosu: Okay, so here's a -- no, it doesn't do that, and this is really interesting.  So what happens, and this is actually another really exciting bit about it; so, as I mentioned in the structure, there's no Lightning node in the way it's currently architected for being a guardian.  At some point in the future, we might consider adding that, but right now there isn't.  So, a guardian has got a Bitcoin node and it's got the Fedimint software effectively, which means the Bitcoin node is able to coordinate with others to make a multisig, and it's also able to create this chaumian mint.  But there is no Lightning node, so how is it able to interact with the Lightning Network, is the question?

Peter McCormack: Yeah.

Obi Nwosu: The question is that it doesn't do it directly.  It creates this incentive structure to incentivise Lightning service providers, so people who are running Lightning nodes, but with a view to try and make profit from it, to connect up with the federation.  The way they do that is this; they will also join -- say you're a Lightning service provider, you're running a Lightning node, so you're part of the Lightning Network; you're relaying Lightning transactions and earning a fee whenever you do; you will then see there's this federation that's a town or a village or 500, 600 people, all wanting to make and receive Lightning transactions, so it's a very lucrative source of revenue for you.

You can join that federation and then you can make yourself available as what we call "a Lightning gateway" between the federation and the Lightning Network.

Peter McCormack: Right, I see.

Obi Nwosu: What happens is, instead of you normally form channels, payment channels, on the Lightning Network, you form, for want of a better phrase "ghost channels", which act and operate like a Lightning channel, but it's actually not a Lightning channel. 

Peter McCormack: They're taking the federated cash?

Obi Nwosu: What will happen is, when this person makes the transaction to pay -- when you look to pay the invoice to Danny, who's using a Lightning wallet that's connected to the Lightning Network directly, or in another federation, what actually happens is, and it's all transparent to you, it's just you're paying the invoice, but your Ecash is sent from you to the Lightning gateway, which is the LSP who's connected up to your federation.  So, it's not destroyed, it's just sent to their balance; their balance of Ecash tokens increases. 

Then they, on the Lightning Network payout, but because all this is replicating the hashed timelock contract payment logic of the Lighting Network for this ghost channel, it's still transactional.  If it fails, then no one ends up requiring trust.  The LSP does require trust in the federation though, because they're holding tokens, for the period of time they're holding the tokens, but they don't require trust with you; it's like a Lightning channel.

But what's incredible about that is, this ghost channel, it doesn't cost necessarily to open and close this or manage this.  So effectively, you can open up channels with all the members of the village, but use the same capital across all of them, so it gives you a number of capital efficiency benefits.  Imagine you had 500 separate people you had to open up a channel with and you had to lock up 0.1 Bitcoin with them?  Instead, you have 500 people and you could maybe only lock up, about in total it would be 5 Bitcoin you have to lock up. 

Now, you could maybe only lock up 0.5 Bitcoin and still service 500 people, meaning that you can service more people and it becomes more profitable.  If it's more profitable, more people set up Lightning nodes and more people become Lightning service providers, making the network more reliable.

Peter McCormack: And, say it's a basechain transaction, so I've got my federated Ecash and I want to send Danny some basechain, does it then burn it --

Obi Nwosu: Danny's very lucky!

Peter McCormack: Danny gets a lot of Bitcoin off me.  He's got a lot; he's got a lot more than me now.  But say I want to send the transaction to him, he's given me his address, what actually happens there?  Can I do that; can I just send to his Bech32 address from my --

Obi Nwosu: Yeah, you can.

Peter McCormack: But what will the wallet do; send it back to the --

Obi Nwosu: In that case, when you want to send on-chain, it would effectively --

Peter McCormack: Burn it.

Obi Nwosu: -- send it back to the mint, and then they will take those IOUs, shred them and put them in the bin; and at the same time, go to the safe at the back and take out the equivalent amount of cash and send it to the address that you used to send.

Peter McCormack: What does it do in terms of fees then?  If I want to send Danny 50 cents on the basechain, it's pointless because the fees could at some point be higher.  Do the fees match?

Obi Nwosu: So, the fees that will be charged get passed on to the person, so it would come out, yeah.

Peter McCormack: Do you think there will become a time where people won't know whether they're sending to a mint or not; is there a distinguishing feature of the addresses?

Obi Nwosu: They are multisig, so you know you're sending to a multisig.  There are potential updates to, for example, Taproot or so on, and other features that could make it, if we chose to implement it -- we will be implementing Taproot; but if we chose to, we can make it so that it's actually not visible to know the difference between a multi-signature transaction and not.  In which case, even now, you know it's multisig, but that doesn't tell you that it's a federation.  And once you use a certain address format, you won't even know it's distinguishable from a singlesig or a multisig.

Peter McCormack: I think I get it now.

Danny Knowles: And the guardians get paid to do their work?

Obi Nwosu: That's a very, very interesting question.  The guardians could be paid, or they could not be paid.  The default and recommended approach is that you seek out people who do not wish to be paid, but there's nothing in the protocol ensures that or forces that.  That's just based on our current view of best practice, and our current view of finding as many mechanisms as possible to give tools for users to fit within exemptions around regulation.

So, regulation's a very complex subject, and it's jurisdiction-based, and you should always seek your own advice and so on, with all these sorts of things.  But having run an exchange for eight years and the first exchange to be regulated in Gibraltar, and spent a lot of time with regulatory advisers, etc, you become aware of certain exemptions which exist around regulation.  

One of the things that became clear with Fedimint and federations is that it already naturally fits within certain exemptions, so why not try and make people aware of some of these and fit in as many as possible?  So, some of the exemptions, or cases around, for example, Bitcoin node operations, because they're unattended operations, that is an indication that -- all these are indications, nothing is ever black and white in a regulation; but an unattended operation is a good indication of something being potentially out of regulation.

Peter McCormack: Could you not be considered a money transmitter in the US?

Obi Nwosu: Again, it depends on where.  But if you're operating in an unattended manner, again you should always seek advice, but if you're operating in an unattended manner, if you are doing something, and this is one of the strongest exemptions; if you're doing something that is not by way of business, that is an exemption which you see in multiple reasonable jurisdictions.  That's why, if you're not looking to make money from running this, and you're doing it for people you have a pre-existing social relationship with, friends and family, etc, that would seem to fit the evidence that you're not running it by way of business.

The reason why that is an exemption is, if you think about it logically, imagine the number of times you perform something that could be considered a regulatory activity, but you're doing it for friends and family and not looking to make money.  If I'm holding money in a piggybank for my son, am I a custodian?  If I'm going to the shops and I'm taking money from my friends to buy something on the way to the shops, am I a money transmitter?  If I go and say, "Yeah, you should buy Bitcoin", am I a financial adviser?

If you're not looking to make money for it, and you're doing it by way of friends and family, or people you have pre-existing relationships with, again obviously these things are always case-dependent and country-dependent.  But that is a stated exemption in the UK and the US.  And another one, there's a third one which, just by nature of the system we fall within, is again another test, which is whether you have the agency to act individually.  And because again, you could set it up to be a 1-of-1 federation, but then that doesn't seem to have the -- that's why we would recommend to have at least three or four, because then no one person has the ability to make a transaction without others.

So again, you don't have agency to move money individually; no guardian has that.  If you're not looking to make a profit, and you're doing it for people you have a pre-existing relationship with; if it's just operating and the day-to-day operation is just sitting there in a room in a box, and you're not doing anything, again that's another area.  Now, the more of those you implement, the more it would give you a tool to say that you're not doing this by way of business and be exempt.  The less you do it, the more you would have to seek advice.

Peter McCormack: Can the signers in the federation collude and steal the Bitcoin?

Obi Nwosu: The answer is yes, if it's the majority of guardians, yes.

Peter McCormack: So, is there a risk here in a scenario, say there was, okay, say Bedford again, we set up a 3-of-5, three trusted members, and this mint starts to grow into quite a decent size, and the Bitcoin does what it does, it goes up in value; I wouldn't do it, but just say I did, say I said, "You know what, guys, there's a few million here.  Let's steal this and do one", does that exist as a risk, and how much have you thought that through?

Obi Nwosu: We spent a lot of time thinking it through.

Peter McCormack: Yeah, because I was just wondering, the thing I'm thinking is, are we encroaching a little bit on that "not your keys, not your Bitcoin"?  You're kind of giving up your private keys.

Obi Nwosu: So, there's two parts to that question, and I'll start with the last part first.

Peter McCormack: Sorry, and I need to throw one other thing in there.

Obi Nwosu: Okay, I might forget that now!

Peter McCormack: No, just to make it make logic.  So, if we stole the Bitcoin from the mint, does that automatically burn the other coins that exist within the wallets?

Obi Nwosu: No, and people find out when they try to withdraw, and it was fractional reserve effectively.  So, you won't know if you try to withdraw and there's no money to withdraw, and it will fail.

Peter McCormack: Can that happen then?

Obi Nwosu: If the majority of guardians collude, then yes, they can move Bitcoin individually, because they have a multi-signature wallet.  So, if they work together, they can take the Bitcoin off, which is why it's important to choose people who you trust, who have a background of prioritising social capital over financial capital.

Peter McCormack: I can think of some great examples.  Michael Peterson in El Salvador, I would save him as a federation -- you can really trust him.  Jorge there as well, I can think of a group of people.  But I'm just saying, if these federations become quite commonplace, you can't help people police everyone who's part of it.  Does it exist as something that can happen?

Obi Nwosu: There's a lot of questions; I might forget.

Peter McCormack: I know.  Basically, can it be stolen?

Obi Nwosu: So, first of all, can we do something?  We think about it a lot, and the recommendation is to try and work with a second-party trusted relationship, and a second party is someone you have a pre-existing, long-standing relationship with, as separate to a third party.  It is a thing, a second party.  A third party is someone that is not yourself, first party; is not someone who you have a pre-existing relationship with, so not friends, family, co-workers and so on, that you've built a human level of understanding about how much you can trust them; and then there's a third party, where it's basically someone you have no first-hand knowledge of, other than what they've told you through advertising or media, or giveaways, or so on.  Effectively, it's a stranger, and that's a third party.

So, we recommended that having custodied many, many millions of people's money for eight years, and seeing what's happened and the incentives around third-party custody, my strong recommendation is to go for second-party trust, because there's two things that people value: financial capital, but also social capital is something that is valuable in society, and there are some people who index very high on how much they value social capital.  Then, on top of that, we use technology to federate that.  So now, because obviously people can always change, but if you have a group of them working together, and you need most of them to collude, we believe that will be a good step in terms of reducing. 

But it goes further than that, because not only would they have to work together to collude, which goes against their own social incentives, they'll be ostracised from the community that they've spent their life trying to build up a reputation with; but we as the producers of the system are looking to add in and bake in education and helpful information to guide people, to protect them as well, as much as we can.  Obviously, some of this will be learning; there's no way we can guarantee we cover everything.

But for example, when you join a federation, we will probably ask you to ask questions, for example, "Do you know the guardians of the federation?  Has the person who introduced you informed you of the information?  If you're not aware of who they are, then maybe you shouldn't join the federation", and stuff like this.  So, there are various points along the way, especially as we're dealing with more and more people using Bitcoin, the average level of knowledge of how to safely handle your money will tend to reduce.

So, it's important, we think, and we think other wallets should do this as well, bake in best practice guidelines when receiving money, when sending money, when joining federations, what you should do and what you should think about, like checklists.  There's a great book, called The Checklist Manifesto, which --

Peter McCormack: The checklist manifesto?!

Obi Nwosu: It's an amazing book, because it talks about how the power of going through checklists massively reduced the rates of plane crashes in the army; and also, it's had a bigger effect than any other intervention in increasing the positive outcomes in hospitals, because most of the time it's due to people just forgetting to do things.  So, we're going to want to implement those mindsets and ideas.

Peter McCormack: Didn't that come up the other day, when I was talking about checklists in the pub?

Danny Knowles: You're a checklist maxi!

Peter McCormack: But did The Checklist Manifesto come up?

Danny Knowles: I don't know.

Peter McCormack: I'm going to dig that out.

Obi Nwosu: It's a great book, but it's a similar idea, just keep checking things.  And one thing we could check, for example, is if it looks like the size of a mint, because we can still observe the amount of money being held by a mint, is above a certain size, we could say, "Look, you are holding this much money on this mint.  Maybe you should consider splitting your money across multiple mints".  Again, as an app, we can say, "We can observe that this size of mint is large.  To move between mints is a Lightning transaction and it costs fractions, it can be done in seconds", and so on.  And joining mints is so easy, you should decentralise your risk.  So again, we can provide reminders, because people may not think about that.

Always set up your own mints.  If this mint that you're joining is becoming too large, maybe you should set up a smaller community mint for your family, and so on, etc.

Peter McCormack: It does remind me a little bit of, it's kind of taken one step back towards banking.  I'm not saying this is a criticism, but today I had to do a bank transfer.  I bought a bed, of all things.

Obi Nwosu: In Bedford?

Peter McCormack: I didn't buy a bed in Bedford, I bought a bed from, I think it was Surrey.  But when I put in their details, it asked me a couple of questions, "Do you know them?  Do you trust this company?"  It was like a checklist of things they asked me about.  Now, they asked me things that you wouldn't do as part of this, they wanted to actually check the transaction kind of stuff, KYC AML kind of questions like, "What are you buying?  Who's it for?" but I've had it a few times, "Do you know; do you trust this person?  Are these details correct?"  There's these little checks in place.

It's just interesting, because I'm thinking you're trying to find solutions to the fact that we're taking some Bitcoin from trustless to part trusted.  But I guess you're saying you're focusing on the people who've held it on exchanges, who've got full trust to be less trustless.

Obi Nwosu: I mean, some people, because of the privacy guarantees that you get, will find that if they're self-custodying, to take their spending money.  And instead of spending it from their own set of private keys and their own wallet, sending it first to a federation and spending it within there, because it will improve their privacy, their personal privacy.

Peter McCormack: That I get.

Obi Nwosu: So, there will be that use case.  But that's not our focus.  If you see our site, our focus is about the fact that billions of people are either excluded from using either solution, first-party custody or third-party custody, and the billions who are potentially capable of custodying, most of them are currently destined to be custodying on exchanges.  So, we're talking about the 90% to 95% who either have no option, or it's third-party stranger custody, is the option.  From that point of view, it's a step in the right direction.

It's not about getting the people who have the ability, they have the monetary means, they have the technical means, and they just have the self-confidence to self-custody.  If you have all three of those, then you should definitely do that.  As you say, that's the Bitcoin standard; that's the gold or the Bitcoin standard, and there are services like Casa, like Unchained, and so on, who if you have the monetary means and it's a larger amount that you're holding, that can help you and steer you through the path of doing a multi-signature manner, and make sure that you follow best practice as well.  But that's 5%, 10%, maybe 20% of the market, and we're talking about 80% to 90% of the market, which is currently destined to not have any option at all, or to hold it on an exchange, and this is a step in the right direction.

Separately, in terms of checklists, that's just good for anyone.  I would suggest, even in a first-party wallet and you're about to make a payment, it would be good to ask questions, because people -- I see it a lot.  It's still prevalent now, but it was very prevalent a few years ago, in parts of West Africa, various scams.  There was OneCoin, there was Bitconnect, there were a few more, I've lost track of the number, and people would fall for these scams, and some would be storing Bitcoin first party.  But if there was a reminder in that app to be careful, "Does it look like a Ponzi scheme?" etc, that could have helped save people. 

If people want to turn off those notes and not have them, it's fine; but if we know that these are potential pitfalls or mistakes that people make, the value and benefit of just reminding people to think about these things before doing a transaction, it doesn't affect decentralisation, it's just about trying to help them in a way which is separate to anything external happening to them.  Because you have to remember, one of the most common ways of getting money from people is, confidence tricksters, it won't be a technical approach, it will be, "You've built confidence in me and I'm telling you to do this thing".  If the app says, "Is anybody telling you to do this thing?  Stop", then that's the final check, and that's probably going to be the most common way most people will be scammed, or so on.

Peter McCormack: The trust spectrum's quite interesting, because we're talking about some people here trying to get them off exchange and trying to get them to maybe use one of these mints, which kind of makes sense, because it's a better scenario.  But I could also see a scenario where there are certain exchanges I would perhaps trust than certain mints because the company is so big. 

So, Quadriga obviously put me in a position where I wouldn't trust any small exchange.  But the top 3-of-5, like your Coinbase, your Gemini, your Krakens, in some ways it's not that I don't trust the regulatory bodies around them, they force them to confiscate your coins; but I trust them not to fuck up losing my coins, possibly more than I would trust maybe a 2-of-3 federation where I don't know the people.  Do you see what I mean?  There's different trust models that go on here.

Obi Nwosu: So, I think the first point to say is that there's a spectrum and everybody has to make their own decisions.  So, if you're in a country which has rule of law, is not managed by dictatorship or authoritarian rule -- by the way, you're already in the minority of the world.

Peter McCormack: I know, Gladstein would tell us that.

Obi Nwosu: You're now at the minority of the world, and then you have exchanges that you feel that you can trust and you're happy to pay their fees for doing that, and they're also happy to have you as a customer as well, because they're regulated entities; therefore, by definition, they will have a criteria for who and who cannot join.  By definition, that means that some people don't fit the criteria.  So, you might want to join and they might not want to have you as a customer.  So, if you can get through all of those hurdles, then you're free to make that choice.

Peter McCormack: I think a mistake I might be making though, is I'm kind of envisaging this from the privilege of a stable western liberal democracy, where I've got multiple options in terms of exchanges that have built a solid reputation, to multisig solutions, to good hardware wallet access; whereas really, you're solving a problem for people in much more challenging environments.  For me, I see the privacy option is where essentially, if I want to send to Danny, I'd send it into the federation and then send from there, that totally makes sense.  But I would never keep all my Bitcoin in a federation.

Obi Nwosu: Yeah, I think people see the privacy value of it.  But also, people who are currently, even in the West, who are in Uncle Jim mode, they're the Bitcoin knowledgeable person within their family and people are asking them to advise them on Bitcoin, to help them buy Bitcoin, help them hold Bitcoin already, again people will be doing this in an ad hoc manner, this allows you to do it and at least do that in a better practice manner, with lower effort, because instead of just being called every time they want to spend it, you can now just set this up, and they can still have the same experience.

However, thinking globally, it seems that, and based on feedback, although there's a lot of interest in the West from a privacy point of view, there's a huge amount of interest from the Global South, and that's an area where, right from day one of starting at Coinfloor, has been an area of interest for me, in terms of Latin America, Middle East, Africa of course; and also, we're seeing a lot of interest in post-Soviet Europe as well.  These are parts of the world where, for monetary reasons, or they're in areas of conflict, they're suffering under the yoke of authoritarian regimes and dictatorships, and this is again more than half the world, billions of people we're talking about; they don't have those options. 

They often suffer under -- we're talking about 10% inflation; Venezuela is 20,000% inflation; currency controls, a lack of options for alternatives.  They don't always -- again, location is dependent, but some of these, they're either unbanked or underbanked, as Andreas would say.  So, we're talking about billions there and if we help those billions, we've already won.  But this is a global product and different people -- it's like a hammer; different people will use the hammer to build a boat, a house or a piece of art.  But it's a tool that can be used in different configurations.

Peter McCormack: Do I seem to be overly grilling you on this particular subject, or has this come up quite a bit?

Obi Nwosu: Which subject?

Peter McCormack: The idea that there is a trust model based around the fact that people could collude.

Obi Nwosu: No, it comes up a lot.  I think it comes up, because most of the audience and the places that we're talking to are from the Global North or the West, and so they're people who really grill; the idea of second-party trust seems to be unusual.  Although then, when you say the Uncle Jim model, most people know either themselves without realising it, or know someone who is advising on Bitcoin, or helping people buy Bitcoin, or holding Bitcoin on behalf of friends and family.  But there is this sort of disconnect between, even though they might be doing it themselves, believing that they won't be able to trust someone; so other people are trusting them, but believing that it's going to be hard to find people who can trust a friend or family, even though they are being trusted at the very same time.

Peter McCormack: Well, we've seen lawsuits in the UK where people have colluded on wills to try and steal.  So, even within family groups, there are trust issues.

Obi Nwosu: Trust issues can happen; but ultimately, the solution is we've got the ability to trust within family, or you have to trust a stranger, which is what's the current option.  Because the stranger is able to provide a flashy website, great advertising, great marketing, has pressed a number of social buttons and UX buttons to make you feel safe, it doesn't change that fact that they could become a Quadriga.

I mean, we've seen recently many, many recent examples of regulated institutions breaking their customers' trust.  So, it's a question of trade-offs.  The ultimate and ideal is for people to self-custody, and again that's part of the education and training within the app.  Above a certain level, we not only would say not only, "This federation is becoming quite large in terms of the Bitcoin it's holding, maybe consider moving or splitting to reduce your risk", the app could also say, "The amount of Bitcoin you're holding is becoming quite large.  Maybe you should consider self-custody", without realising it.  Because again, people don't realise when they go from just a small amount, then it goes up 10X. 

Again, it's a bit like a computer game.  Depending on the age of the audience, there was a game called Budokan, the way of karate.

Peter McCormack: I remember this!  Hold on…

Obi Nwosu: Yeah, it was this great game, but this is like the 1990s or 2000s.

Peter McCormack: Danny, try and find a screenshot for me.

Obi Nwosu: Of Budokan?

Peter McCormack: Is this like Spectrum?

Obi Nwosu: It would be something like that, yeah.  It's sort of pre-Prince of Persia.  But in that game, I remember rushing to buy this game, and it had this manual and the manual was like this thick!  It was a book, it was 80, 90 pages long and all these moves and so on.  You sort of read the first few pages and then you just gave it --

Peter McCormack: Yeah!

Obi Nwosu: That's the one, yeah, Budokan: The Martial Spirit, that's it.

Peter McCormack: Oh, yeah!

Obi Nwosu: I just remember the manual was just this tome that you had to read.  And it was probably one of the last ones on my mind of games where I read the manual, because there were so many different moves.  Now, with modern games, what would happen is instead of giving you this book to read and then you play the game, the first few levels of the game were the instructions.

Peter McCormack: Yeah.

Obi Nwosu: And now, there's either no instructions, or just a pamphlet.  And it's the same with modern electronics, they try to break it into the process, because the understanding is that to educate people, you don't want to tell them to go off to this separate thing, but you want to bake it into the process.  And that's what leads to best practice and the best results.

So, part of what we're doing is not just -- as I say, we're thinking about hit holistically.  It's not just an incredible form of privacy, this form of decentralised custody, but it's also this vision of, we're trying to deal with the problem end-to-end, the way Apple and the iPhone tried to deal with the problem of people being able to communicate end-to-end.  So, it was not just a phone, it was the stores, it was the online App Store as well.

We'll be looking at how do we get people to be hyperbitcoinised, Lightning Bitcoin and custody is part of it, as is the end-to-end process of what is their daily lived-in experience and need for money.  So, remittance, make that easy; or to earn money, make that easy, and so on.  But also, education and best practice, we think, will be to bake that into the app as well.  So, there will be a time when you get above a certain value that it makes sense to self-custody, and it shouldn't just be us.  We think it makes sense in the app to start saying, "Well, maybe you should start to think about self-custodying", even helping them get to that process.

Peter McCormack: I feel like you were trying to jump in a couple of times there.  You should be louder, man, just say, "Shut the fuck up, Pete!"

Danny Knowles: I was just wondering if there's a physical security issue, where if the guardians have to be, or don't have to be, but are largely public figures, and let's say it's a 3-of-5 guardianship, you could use Bitcoin podcast as an example.  So, it could be like Stefan, Peter, Matt Odell, Marty Bent, Daniel Prince, let's say; you've got a 3-of-5.  Does a $5 wrench attack become a $15 wrench attack, when one federation controls a fair amount of money; is there a physical threat to those people guarding it?

Obi Nwosu: So, I guess it depends on the context, and it depends on if -- for example, if it's a regime that can be violent, or so on, the risk is higher or lower.  If you're already public figures, there's already a risk you're taking on, because people are going to be aware that you're in the space, and they're going to make assumptions anyway.  One thing to remember is that guardians do not need to be physically connected with the community, they just need to be connected from a relationship point of view.

So, let's take the scenario where you have a family, and somewhere in the diaspora they're often sending money home to relatives abroad, and there's a village with many, many people who are the recipients.  That village might be in a place which is actually not necessarily safe to be a guardian.  But members of the diaspora could be the guardians, who are in New York and London, and they're often sending large parts of their paycheque back to the people back in the village.  This is a very common scenario.

If they're already giving large parts of their money to the federation, to the village or to the relatives abroad, it seems like you could probably trust them to custody the money that they've been spending and giving as well.  But also it means that their location is physically separate to where most of the money is being used.

The other thing is, because of the peer-to-peer nature of how federations are formed, outside of the federation, there's no reason for anyone else outside of the federation, unless you publicly announce that you've got this federation, to ever know about it, because a group of people who, say, want to set up a federation, the village will then say that, okay, these people again could be in the West, for example, because that's where they're working and earning for example; they set up the federation.  Or, they can be in the same place. 

Then, people will join on a person-to-person basis, scan their QR code, and they've sort of no incentive to tell anyone else that they're part of a federation.  It looks like a wallet app, it acts like a wallet app, on-chain it appears like a wallet.  And, you're getting benefit, it doesn't benefit you to tell people that you're using it as part of a federation, or who the guardians are.

Danny Knowles: Unless the guardians are making a fee, presumably?

Obi Nwosu: I mean, if they're making -- why would that make you want to --

Danny Knowles: Would they not want to incentivise more people to come in if they're making a fee?

Obi Nwosu: Potentially.  That's an interesting point, potentially.  But as I said, my recommendation is to not charge a fee; it just makes things simpler.  You're not earning any revenue from it, therefore you don't have to deal with tax issues and corporation tax, and you reduce the risk of being considered a regulated activity, which would increase your overhead by a thousand-fold, so probably dwarfing any revenue you'd make from if you do take that route.  Making a commercial enterprise that's profitable is not an easy thing to do.

Peter McCormack: Especially in Bitcoin.

Obi Nwosu: And, you always have the ability to, for example, a guardian might be an obvious candidate to have a Lightning node that services the federation, and that can make money, because that's a separate thing.  And that Lightning node doesn't need to be trusted by the federation.  And so, because it doesn't need to be trusted by the federation, it's much lower risk for that to be a profitable enterprise.  Also, a federation could have multiple Lightning nodes, or federation members connect to multiple Lightning nodes, so it leads to a competitive marketplace.  But the creation of a productive Bitcoin community leads to multiple opportunities to generate revenue in other ways.

Peter McCormack: I wonder how much Chainalysis are looking at you guys thinking, "What do we do about this?"

Obi Nwosu: Well, I mean if and when -- not if, when Fedimint federations are widespread, and we're talking about tens of thousands, hundreds of thousands of them, within the federation as I say, it's cryptographically near perfect privacy, you're severely limiting what can be done by an organisation like Chainalysis.

Peter McCormack: Good, fuck them.

Obi Nwosu: I don't know what they'd be thinking about it.

Peter McCormack: Talk to me about the privacy; why is the privacy so good?

Obi Nwosu: So, if you take that example of the kiosk again, that's clear; mum and dad and children go off into this fairground and each ride is a merchant or a service or whatever they're using it for.  The exchange in that example, you can probably imagine it's a clear piece of glass in front of the kiosk, but the innovation by David Chaum was this thing called "blinded signatures", and this can be described in many ways.  But in this example, imagine that the kiosk window is painted over black.  So, all you have is the hole in the wall to pass through -- I had a weird thought there!

Peter McCormack: I know where you're going there!

Obi Nwosu: A hole in the wall to pass through the Bitcoin, okay.  I think both of our heads were going there; that's also really wrong!

Peter McCormack: Are we talking George Michael here?!

Obi Nwosu: So anyway, that's the fairground gloryhole! 

Peter McCormack: "What the fuck is this?!"

Obi Nwosu: That's the cool thing about privacy as well, the privy, privacy! 

Peter McCormack: Gloryholes offer pretty good privacy!

Obi Nwosu: Privacy in the privy!  So, you go to this kiosk, you paint over the window and you pass through your Bitcoin and you get back these IOUs.

Peter McCormack: What do you owe me?!

Obi Nwosu: Oh, my days!  I'm trying to keep a straight face here.

Peter McCormack: I know, I won't look you in the eye.

Obi Nwosu: We're doing a good job.

Peter McCormack: Carry on, I won't look you in the eye.

Obi Nwosu: So, you get back the IOUs and effectively, you as the kiosk operator have no idea…!  Oh, my days!  You have no idea who you're giving the IOUs to.  So, if you add to the fact that once they have the IOUs, they can do whatever they want within the fairground, they can exchange tokens, pass it to other friends, etc, you can just intuit the fact that basically, you have perfect privacy.  You as the kiosk operator have no idea how many people are inside the fairground, what they're transacting for; when you're providing change, who you're providing change for; when people are redeeming, who are people redeeming for.

So, although it's a very simple idea conceptually, and the cryptography is nearly 40 years old, 1983, yeah it's like 39 years old, conceptually it provides cryptographically near perfect privacy.  You can still do potentially timing attacks, and so on; you will also have different types of tokens, so you will have $1-denominated tokens, or 0.01-Bitcoin tokens or 100,000-sat tokens, so you would have an idea of how many of a given type you have across the entire user base, so that's why we say it's near perfect, because for practical purposes, you don't want everybody just to walk around with tons and tons of sats tokens, so you do different denominations, just like normal cash.

Peter McCormack: Yeah.  I had to stop looking at you there!

Obi Nwosu: We did well; I think we recovered it there at the end!

Peter McCormack: Yeah, I think so.  I just hope my dad doesn't listen to that one.  By the way, congratulations on the raise.  What was it, 4.2?

Obi Nwosu: Yeah, 420, and it was $21 million post-money valuation as well.

Peter McCormack: That means you can just do what the fuck you want.

Obi Nwosu: Oh, we could do a lot.  But also, the site's designed to be very simple, but there's lots of little easter eggs.

Peter McCormack: Congratulations on that, that's pretty impressive.  How are you guys intending on making money yourselves; is it just you're charging people to use the wallet; is it transaction fees?

Obi Nwosu: It's the wallet.

Peter McCormack: Because wallets are hard to make money off sometimes.  I know some are doing okay.

Obi Nwosu: Yeah, but there are a lot of ways.  I mean, our target is to get a billion users using this software, and my goal is to get that in a relatively short period of time.

Peter McCormack: Tell me, come on, how long are you going for?

Obi Nwosu: In a matter of a few years.  And that's Fedimint.  You can show both, because Fedimint is the protocol; it's good to see the two.  And the protocol is this open-source protocol, it's great because we have incredible support by the development community.

Danny Knowles: What's the Fedi website?

Obi Nwosu: Fedi.xyz.  But it's good to see both, so this is Fedi, and this is for the wallet.  And as I say, our focus is getting people off exchanges.  And there's people who want to be on exchanges who can't even get on exchanges.  So, that's where Fedi, powered by Fedimint, helps.  We've got an incredible set of investors, one other I can't mention yet, but all Bitcoin-only and, yeah, but at the bottom, there's just little things, we say, "Established", but we have a block height.

Peter McCormack: Do you know what?

Obi Nwosu: What's your block height?

Peter McCormack: You know the football team?  Get up our logo.

Obi Nwosu: But just a second, if you add it up, it's 7 plus 4 plus 5 plus 5 equals 21 as well.

Peter McCormack: So, did you have to wait for that block?

Obi Nwosu: We waited for that.  And also, when you go in the block, the amount sending is 21 million millisatoshis as well, and the change is 7 million millisatoshis, which is 21 million divided by 3, because of the 3 founders, so there's all this sort of stuff.

Peter McCormack: Do you like Football?

Obi Nwosu: My team is QPR.

Danny Knowles: So, no!

Peter McCormack: You hate football!  So obviously, all teams on their logo, they have the year they were established.  We went for the block we were established at.

Obi Nwosu: And you waited for that block, did you?

Peter McCormack: No, that block didn't matter.  I literally, when I did the registration, I went for it.  I'll bring a shirt down and show you.  We've also got "Running Bitcoin" on the back of the shirt.  It's amazing --

Obi Nwosu: Our first tweet on our tweet post was the block height, and we also had an OP_RETURN on that block.  So, if you go to the website just briefly, and I think if you click on that block, there's an OP_RETURN.

Danny Knowles: "Fedi has arrived".

Obi Nwosu: Yeah, so we also got the block at the time, and the amount is -- because the Lightning Network is one-thousandth of a sat, so it's 21 million millisats as well.  So, there's all this really cool stuff.

Peter McCormack: How do you guarantee it gets into that block?

Obi Nwosu: We use a lock time, we use an end lock time, so it would come in the block afterwards.  You can't guarantee for sure, but you know.

Peter McCormack: You'd be so pissed if it had been the block afterwards, 22!

Obi Nwosu: We would have still been fine.

Peter McCormack: No, look, it's very cool, man, it's very cool.  I like what you're doing and I wish you all the best for this.

Obi Nwosu: Thank you.

Peter McCormack: It's very interesting.  I love the buzz that's around it, I love the fact that it's a Bitcoin-only project, I love the fact that you're doing it, your investors are fucking great, the ones that I know of.

Obi Nwosu: It has to be Bitcoin only.

Danny Knowles: You're wearing their hat.

Obi Nwosu: Yeah, Ten31.

Peter McCormack: Do you know what's so cool about this?

Obi Nwosu: Tell me.

Peter McCormack: It's my birthday.

Obi Nwosu: Oh, really?

Peter McCormack: Yeah, I was born on Halloween.

Obi Nwosu: Wow!

Peter McCormack: I've got the pumpkin up here.

Obi Nwosu: So, you were destined to be involved with Bitcoin then?

Peter McCormack: Well, I don't want to start any rumours.  Tell people where to go, I mean we've just had it up, but tell people where to go to find out more, who do you want to hear from?

Obi Nwosu: Yeah, so if you want to find out more, definitely go to fedi.xyz for the wallet, to hear about over the coming months when we launch it.  And Fedimint, if you're really interested in working on the open-source protocol.  Both the commercial company and Fedimint are looking for incredible engineers to work on it.  Then, to find out about us, @fedibtc on Twitter, and me myself personally, @obi on Twitter.

Peter McCormack: And, is there anything I didn't ask you, you wish I had asked you?

Obi Nwosu: Well, the segue into gloryholes really pissed me off!  But there's an incredible amount of human rights defenders, activists that we're working with.  We're trying to select the first places where we're going to put a lot of effort, not just to roll this out, but to get to hyperbitcoinisation.  But I think we covered a lot of things, and maybe we can have a follow-up conversation.

Peter McCormack: Whenever, man.  Listen, you're welcome on whenever.  I mean, maybe once it's out there and somebody's using it, and get some feedback on it.

Obi Nwosu: I think that's a good idea.

Peter McCormack: Are you going out to the conference in Ghana?

Obi Nwosu: Yeah, we're sponsoring it.

Peter McCormack: Oh, I didn't know that.

Obi Nwosu: We might have something to announce there.

Peter McCormack: Well, we might be there.

Obi Nwosu: No, you should definitely.  There's going to be a lot of people that are going to be surprised, because you know I'm also a board member at ₿trust, and so on.

Peter McCormack: Are you basically saying Jay-Z's going to be there?

Obi Nwosu: I'm not commenting, but there's going to be lots of interesting people there.

Peter McCormack: Have you got to hang out with him?

Obi Nwosu: We don't talk about the -- but they're an incredible group of people working on it, and also, not just the board members I work with, who are amazing, but also the people who helped bring us together.  I feel very fortunate.  I'm working on all Bitcoin, empowering the globe itself, all with global impact and all the time.  So, I just love it.

Peter McCormack: Are you living your best life, man?

Obi Nwosu: I'm living the best life right now.

Peter McCormack: Well dude, listen, anything we can ever do, you hit us up, you give us a shout.

Obi Nwosu: Thank you.

Peter McCormack: If you want us to share anything, you want to come on the show, you've got something new to tell us, tell us.  This is a very cool project and it's a real honour to have you on to talk about it.

Obi Nwosu: Thank you.

Peter McCormack: I wish you the best, and can we eat yet, or have we got about a couple of hours?

Danny Knowles: We've got to wait until 6.30pm.

Obi Nwosu: 6.30pm, yeah, intermittent fasting.

Peter McCormack: Jesus, man!  All right, well we'll wait until 6.30pm to eat.  But listen, all the best, man, appreciate you.

Obi Nwosu: Thank you very much, we're going to work really hard to deliver on what everybody's been looking for from us.

Peter McCormack: I think you're going to absolutely crush it.

Obi Nwosu: We will, thank you.

Peter McCormack: All right, man.

Obi Nwosu: See you.