August 3, 2023

How Bitcoin Scales (Fedimint)

Bitcoin University

This video discusses both the Fedimint protocol and Fedi the company to see how federations might be used to scale Bitcoin to billions of users.

Fedi's software allows you to set up a "federation" controlled by trusted members of your community called "guardians." Or you can use the open-source Fedimint protocol for free and write your own software that does this.

A federation is a place for a real-world community (like a village, neighborhood, extended family, group of artisans or farmers, etc) to gather online to trade goods and services, message each other, store individual or community data in an encrypted manner, etc. Think of it as a cross between a community bank and a Facebook group, but much better because it is run by local people who are much easier to trust than bankers or large tech companies.

Let's say you join your local village "federation" by simply downloading the Fedi app on your phone and then scanning a QR code invite from your community. You may also choose to send in 100,000 sats (1 Bitcoin= 100 million sats), which is about $30 today.

Those sats immediately get secured by the multi-sig setup on-chain and then you are issued e-cash (also denominated in sats) that you can use to pay people inside of the federation. Now you can use that e-cash to pay the local butcher, farmer, artist, or family member who are also part of the federation. Those e-cash payments within the federation are basically free and instant.

If your phone is offline, you can still pay people successfully using this e-cash, since Chaumian e-cash is a bearer asset. That's one answer to people who wonder how Bitcoin might work if the local internet is down.

Note that this e-cash is not an altcoin-- it can at all times be cryptographically proven to be fully backed by real BTC that is being held in that multi-sig address by the federation.

At any time you want, you can ask the guardians to convert your unspent e-cash into sats and withdraw it to self-custody either through an on-chain payment or using the Lightning Network.

Now imagine a world of thousands of federations (different communities) each linked to each other using the Lightning Network.

Here's another plus: guardians of the federation CANNOT see how much Bitcoin you hold inside the fedimint or what transactions you are making with people inside of the federation. This is what we mean by making Bitcoin usage more private at higher layers.

If successful, Fedimint and federations will be one more tool in our toolbox of ways to increase global Bitcoin adoption.