Ecash systems built on top of bitcoin have seen increasing adoption over the last couple of years. They have become a polarising topic in the bitcoin community, due to their centralized and custodial nature. Like any system, ecash comes with a lot of pros and cons when compared to other systems, that are fercely debated in cyber- and meat-space.
I have been working on developing tools and software for the ecash implementation Cashu for about 2 years now. I have had countless discussions with various people from different backgrounds about the topic. OG bitcoiners, fiat bankers, friends and family, privacy enthusiast... . As you can imagine the flow and outcome of these discussions varied widely.
Usually, conversations with bitcoiners were the most interesting for me. Their opinions about ecash polarised the most, by far. (excluding the fiat bankers, but that's a story for another day). In this short peice, I want to share some insights from the discussions I had, and maybe clear up some misconceptions about ecash on bitcoin.
What is Ecash?
If you still don't know what ecash is, sorry, I won't go into much detail explaining it. I recommend reading the wikipedia article on Ecash , and then this article on the rise and fall of digicash, the first and maybe only ecash company that existed. This will bring you up to speed on ecash history up until bitcoin entered the scene. Ecash was pretty much dead from the day after digicash went bankrupt untill it recently saw it's revival in two different spheres:
One of these spheres is obviously the bitcoin sphere. Here, ecash got reintroduced with the two open source projects Fedimint and Cashu. In my opinion, the main reason for this revival is the following fact: Unlike an implementation of ecash in the fiat world, that would rely on the permissioned system to "allow" something like ecash to exist, bitcoin does not come with that limitation. The permissionless nature of bitcoin allows for these protocols to exist and interoperate with the existing bitcoin stack.
The second, and maybe lesser known sphere is the revival of ecash as a CBDC. Bitcoiners might get scared at the mentioning of that word. Trust me, I don't like it either. Nonetheless, privacy enthusiasts see the opportunity to steer the CBDC-ship in another direction, by using an underlying technology for them that would limit targeted discrimination by the centralized authorithy. Something that works like cash... but in cyberspace... Ecash. One such implementation is GNU Taler, another one is Project Tourbillon. Usually, these kind of implementations use a cuck-version of the OG ecash, where only payers are anonymous, but not payees.
Anyway, in this article we will focus on the implementation of ecash on bitcoin.
About self custody
Bitcoin as a whole is about sovereignty and liberation. If someone else controls your money, they control you. For the first time since we've stopped using gold, bitcoin allows us to fully take control back of our money. A money that doesn't corrode, a money which supply connot get inflated, and a money that cannot be easily seized. All of this is true for bitcoin. There is only one precondition: You have to hold and use it self custodially.
Using bitcoin self custodially
The problem comes in when using bitcoin in a self custodial fashion. For bitcoin to maintain the monetary properties mentioned above, it has to remain decentralized. This means it is hard to scale, which in turn means the use of bitcoin tends to become more costly as usage increases.
So even if we wish that everyone would use bitcoin self custodially all the time for everything, I fear it is mostly just a dream, at least for the forseable future. Even with trustless second layer protocols like the Lightning Network, we are running into scaling issues, since at the end of the day, they are bound to the same onchain fee realities as bare-bones bitcoin transactions.
For most of humanity, it is financially not viable to pay even 1$ transaction fees for every transaction. Second layer protocol may bring the cost down a bit, but have other requirements. For example in lightning, you have an online assumption, to make sure your channel peers aren't trying to cheat. You need to have inbound liquidity to receive payments. There are cost associated with opening or closing payment channels, or rebalancing liquidity.
Other upcoming second layer protocols like Ark may improve on some of these issues. It is definitely something to look forward to! But they will have their own trade-offs, most likely also cost related. The fact remains that all trustless protocols that use the bitcoin timechain for conflict resolution, will have to deal with this matter. This is the cost of trustlessness.
Soo... Don't self custody...?
NO! If you can, you should always use self custody. As much as possible!
Personally, I use all the tools mentioned above. And I recommend that if you can, you should too.
But the fact is, not everyone can. Many would love to take control over their financial freedom, but the threshold for them to use bitcoin in a sovereign fashion is simply to high. So they will either remain in fiat slavery land, or they will end up using "bitcoin" through a custodian like coinbase, binance, or whatever banking service they have access to.
I will also mention that for some usecases, enjoying the convenience of a custodian is just very attractive. Of course, this is only the case as long as the custodian plays by the book, and doesn't suddenly freeze-, or worse, run away with your deposits.
The right tool for the right job
I don't beleive that one way of using bitcoin is better than the other. It entirely depends on which problem you are trying to solve.
If the problem is storing or transfering wealth, then of course you would want to do that on chain.
If on the other hand, you want to send and receive frequent small to midsized payments, you might want to get setup with a lightning channel to an LSP. Depending on how deep you want to get involved, you may even set up some infrastructure and become part of the Lightning network.
If you want to receive digital tips that you can later claim into self custody after they reach a certain threshold, you might opt for a custodial solution.
If you require certain properties, like offline peer-to-peer transferability, or cash-like privacy, you might choose an ecash system.
It doesn't mean that if you use one, you cannot use the other. You should use whatever is useful for the current problem you are trying to solve, maybe even using multiple tools in conjuction, if that makes sense.
Ecash vs Onchain vs L2?
First of all, we have to understand that ecash is neither a replacement for self custody, nor is it a replacement for trustless second layer protocols. They are irreplaceable with something that is custodial in nature, due to the simple fact that if you lose control over your money, you have lost the control over your life.
So. No one beleives you should prioritize custodial solutions to secure your wealth. Self custody will always remain king in that regard. Custodial wallets should be thought off as a physical spending wallet you can walk around with, even through the dark alleyways where it might get robbed from you. Keep your cash in there for convenient spending, not worrying about fees, liquidity, data footprints, channel backups, etc. etc. etc... These benefits obviously come at the cost of trust, that the provider doesn't rug-pull your deposit.
I really like the user experience of custodial services. I would never put a lot of money into any one of them though, because I don't trust them. Just like I wouldn't walk around with $10000 in my physical wallet. The risk that it gets stolen is simply to great. At the same time, this risk doesn't mean I will get rid of my physical wallet. I think having a wallet with some cash in it is super useful. I will mittigate the risk by reducing the amount I carry inside that wallet. This is the same way I think about digital money I hold in custodial wallets, be it an ecash service or others.
All things considered, it is hard to argue that self custody comes even close to the UX a custodian can give you, due to the fact that they can take care of all the complexities (mentioned above) for you.
So then, why ecash?
We now know, that we are NOT comparing ecash with the sovereign bitcoin stack. We are comparing it instead to traditional custodial systems. This is the area ecash is trying to improve uppon. So if you've chosen that the best tool to solve a problem might be a custodial solution, only then should you start to consider using ecash.
It offers a more privacy preserving, less burdonsome and less censorable way of offering a custody solution.
It offers some neat properties like offline peer-to-peer transactions, programability, de-linkage from personally identifiable information, and more.
Here is an example, on how ecash could create a fairer environment for online consumers:
Online services love to offer subscriptions. But for the consumer, this is mostly a trap. As a consumer, I would rather pay for a service right now and be done with it. I don't want to sign up for a 10 year plan, give them my email address, my date of birth , create an account, etc...
One way of doing that, would be for the service provider to accept payments in ecash, instead of having an account and subscription model.
It would work like this:
- The user creates ecash by paying into the service's mint. Hereby it is not required to use lightning or even bitcoin. It could be done with any other value transfer meduim the service provider accepts (cash, shitcoins, lottery tickets...).
- You use the issued ecash, to retreive services. This could be anything from video streaming, to AI prompts.
- Once you are done, you swap your remaining ecash back.
In a system like this, you wouldn't be tracked as a user, and the service provider wouldn't be burdoned with safeguarding your personal information. Just like a cash-for-goods transaction in a convenience store.
I beleive the search engine Kagi is building a system like that, according to this podcast. It has also be demoed by https://athenut.com/ how it would be implemented, using Cashu.
Here is another example, on how an event organizer can provide privacy preserving electronic payment rails for a conference or a festival, using ecash:
If you have been part of organizing a conference or an event, you might have experienced this problem. Onchain payments are too slow and costly. Lightning payments are too flaky.
Do merchants have to setup a lightning channel? Do they have to request inbound liquidity from an LSP? Do they have to splice into the channel once they run out of liquidity? In practice, these are the realities that merchants and event organizers are faced with when they try to set up payment rails for a conference.
Using ecash, it would look like this:
- Event organizer will run a dedicated ecash mint for the event.
- Visitors can swap into ecash when ariving at the entrance, using bitcoin, cash, or whatever medium the organizer accepts.
- The visitor can spend the ecash freely at the merchants. He enjoys good privacy, like with cash. The online requirements are minimal, so it works well in a setting where connectivity is not great.
- At the end of the event, visitors and merchants swap their ecash back into the preferred medium (cash, bitcoin...).
This would dreastically reduce the complexity and requirements for merchants, while improving the privacy of the visitors.
A bold experiment: Free banking in the digital age
Most bitcoiners will run out of the room screaming, if they hear the word bank. And fair enough, I don't like them either. I believe in the mantra "unbank the banked", after all. But the reason I do so, is because todays fiat/investment banks just suck. It's the same problem as with the internet platforms today. You, the "customer", is not realy the customer anymore, but the product. You get sold and squeezed, until you have nothing more to give.
I beleive with a sound money basis, these new kind of free banks could once again compete for customers by provididng the best money services they can, and not by who can scam his way to the money printer the best. Maybe this is just a pipe dream. But we all dream a little. Some dream about unlimited onchain transactions (I've had this dream before), and some dream about free banks in cyberspace. In my dream, these banks would use ecash to respect their users privacy.
Clearing up misconceptions and flawed assumptions about ecash on bitcoin
Not only, but especially when talking with bitcoiners there are a lot of assumptions regarding ecash on bitcoin. I want to take this opportunity to address some of those.
Ecash is an attack on self custody
As we've mentioned above, ecash is not meant to compete with self custody. It is meant to go where self custodial bitcoin cannot go. Be it due to on-chain limitations, or network/infrastructure requirements. Ecash is completely detached from bitcoin, and can never compete with the trustless properties that only bitcoin can offer.
Ecash mints will get rugged
100% correct. Every custodial solution, be it multisig or not, will suffer from this risk. It is part of the deal. Act accordingly. Plan for this risk when choosing to use a custodial system.
Working on ecash is a distraction from what really matters, since it is not self custodial
While it is true that improving self custodial bitcoin is one of the most important things our generation will have to solve, it doesn't mean that everything else becomes irrelevant. We see that today, in a lot of circumstances a fully sovereign setup is just not realistic. At which point most users will revert back to custodial solutions. Having technology in place for users that face these circumstances, to offer them at least some protection are worth the effort, in my opinion.
Ecash mints will retroactively introduce KYC
Yes it is true that ecash mints can do that. However, what would they learn? They would learn about the amount you were holding in the mint at that time, should you choose to withdraw. They would not be able to learn anything about your past transactions. And needless to say, at which point you should be one and done with this mint as a service provider, and move to someone that respects their users.
Ecash will be used to "steal" bitcoins self custodial user base
I would argue the oposite. Someone that has realized the power of self custody, would never give it up willingly. On the other hand, someone that got rugged by an ecash mint will forever become a self custody maximalist.
Closing thoughts...
I hope you enjoyed reading my take on ecash built on bitcoin. I beleive it has massive potential, and creators, service providers and consumers can benefit massively from ecash's proposition. Using ecash doesn't mean you reject self custody. It means you have realized that there is more tools than just a hammer, and you intend to use the tool that can best solve the problem at hand. This also means, that to some the tool "ecash" may be useless. After all, not everyone is a carpenter. This is also fine. Use whatever you think is useful, and don't let people tell you otherwise.
Also, please don't take my word for it. Think for yourself.
Best,
@Gandlaf21