A Proposal for Trustless Custody

The person behind the proposal has introduced an innovative Layer 3 protocol aimed at addressing some of Bitcoin's significant challenges, particularly around trust and custody in transactions. They underline that despite Bitcoin's revolutionary presence in the financial world, it inherently suffers from compromises such as slow transaction speeds compared to traditional card payments, high transaction fees for small amounts, and limited functionality restrained by game theory. Among various solutions proposed to mitigate these issues, custodial Lightning networks emerge as a promising option because of their user-friendly experience, cost-effectiveness, and speed. However, this approach is critically limited by its fundamental requirement for trust in custodians, contradicting Bitcoin’s core value of decentralization.

The introduction of ecash as a privacy-enhancing measure is acknowledged but criticized for not eliminating the need for trust. The proposed protocol seeks to overcome these hurdles by ensuring transparency and accountability without compromising on the non-reliance on trust. This involves a detailed mechanism for auditable cryptographic ledgers, where updates signed by the custodian can be independently verified, coupled with a system for proving reserves to ensure the honesty of the ledger.

A notable innovation of this protocol is its approach to recovery, diverging from the common practice of allowing unilateral exit strategies in Layer 2 protocols. Instead, the design promises fund availability within the system, leveraging Lightning networks and introducing a novel system where partners can confiscate funds if necessary, through a transparent and accountable process involving multisig agreements and voting mechanisms to decide on the legitimacy of funds in contentious scenarios.

The proposal emphasizes the potential benefits of creating a network of bonded custodians on the Lightning network, which could offer no-maintenance, zero UTXO Lightning wallets that enhance Bitcoin's scalability and usability. This system envisages rewarding honest participants and penalizing dishonesty, thus aligning incentives with the protocol's integrity and trustlessness.

Finally, the author shares a personal note on their journey of developing this protocol, highlighting the solitary yet determined efforts marked by extensive software development experience. They express a call to action for feedback and scrutiny on their work, reflecting a genuine pursuit of validation or constructive criticism to refine or pivot away from the current project direction. The shared link (GitHub Repository) directs to a whitepaper for those interested in a deeper dive into the technicalities and justifications of the proposed Layer 3 protocol.