BlueMatt still thinks self-custody is important
Between MSTR and the ETFs, it feels like a big wave of people who don't care about self-custody have come into Bitcoin. In addition, many of the solutions for using bitcoin as payments don't exactly live up to the decentralized, no-trusted-third parties vision. We don't want to lose sight of self-custody:
If we give up on decentralization, we lose the properties that make bitcoin bitcoin.
This is the foundation of Bitcoin: if it doesn't have censorship resistance, it doesn't have any value.
The state of self-custody
Surveying the Bitcoin landscape, BlueMatt doesn't like what he sees:
Maybe the most pernicious issue is trust. Not only is the ability to transact without trusted intermediaries a key goal of bitcoin, but increasing adoption of trusted systems drives centralization, **as trust does not scale. ** (emphasis mine)
I've heard people say things like "Trust is a scaling solution" before. I'm interested that BlueMatt is taking the opposite view here. He elaborates a little bit in the next sentence:
While it’s perfectly reasonable for many bitcoiners to use trusted intermediaries (leaning on trust, after all, makes many things more efficient), there will never be a world with many trusted options.
If by scaling, we mean more people thinking they are using Bitcoin, then perhaps trust does scale. But as far as Bitcoin is concerned 10 million new people using a new custodian looks like one new bitcoin user. In this sense, all those people being willing to trust their custodian didn't actually change the dynamics of Bitcoin. Trust doesn't actual scale Bitcoin, it just tricks us into thinking the system has scaled.
(Taking the opposite side of this argument, a little trust can make things so much easier...for instance, in the case of a state-chain, users kind of share pieces of a key to a utxo. The trust is that the statechain operator doesn't collude with other users to steal your bitcoin, you have to trust that the operator deletes records -- which is something you cannot prove. But by sharing the utxo in this way, users of the statechain can move many of their transactions off the bitcoin chain -- making them faster and cheaper.)
But it's worse than that -- trust begets more trust.
When counterparty trust is required, we inevitably see massive centralization as people prefer larger entities due to their accumulated social capital. This may leave some bitcoin in decentralized cold-storage, but when the only platforms through which bitcoin can be transacted are entirely KYC and AML, such bitcoin is effectively value-less; what is the point of a bitcoin in self-custody if you can’t use it?
You may remember when Wallet of Satoshi announced earlier this year that they were coming back to the US with a "self-custodial" app...except the app was using Spark as a backend, but even more than that it was set up in a way that the somewhat weaker decentralized properties of Spark didn't even really apply to WoS's users (#1020261).
There are a lot of wallets using more trusting solutions to provide convenient payment apps. The ecash wallets are one example of this (you trust the mint to always buy back your ecash tokens with sats), as is the Breez SDK (you either trust the liquid federation to let you trade LBTC for real BTC or you trust a Spark entity to not collude with other users to steal your sats). All these wallets provide a pretty good user experience, but is it worth it?
BlueMatt also addresses the reliance on LSPs. While perhaps less of sin against decentralization than the previously mentioned more custodial wallets, the fact is:
Every competitive mobile Lightning wallet relies on a centralized LSP.
I'll admit that I find the LSP model very convenient. I don't have to run a server. I don't have to think about channel management (as much). BlueMatt points out that it comes with risks -- when Phoenix pulled out of the US after the Samourai arrests, many users might have felt they were stranded. (Personally, I always used Phoenix via Tor and their announcement that they weren't servicing the US anymore didn't affect me -- however, it is the case that as the LSP they could have said we will only offer our services to KYC'd customers from now on, and shut all the channels that didn't KYC -- clearly a weak point in the system).
When the competition cuts corners, those who might not otherwise feel compelled to are forced to as well—the most trusted option is generally the most efficient.
@bluematt's post puts me in mind of @justin_shocknet's staunch defense of P2P Lightning as the only real, decentralized payments solution we've seen so far.