Multisig Digital Bearer Instruments - peer to peer electronic cash

The presented cryptographic protocol introduces a novel approach to trustless Bitcoin bearer instruments, focusing on enhancing security and autonomy for the bearer. The protocol employs a 2-of-3 Pay-To-Script Hash (P2SH) multisig configuration where the key distribution is strategically inverted compared to previous models. In this unique setup, the bearer possesses two keys (Keys B and C), which are sufficient for spending, while the issuer only holds one key (Key A) that remains below the transaction threshold and is deleted after the address's initial creation and before any funds are deposited. This design ensures that the issuer cannot spend, block, or be compelled to facilitate a transaction, with Bitcoin’s consensus rules providing enforcement rather than policy.

Significant innovations accompany this primary mechanism. One such advancement includes a buyer-generated key issuance protocol that mitigates risks associated with a malicious issuer. Additionally, the introduction of a Nostr receipt mechanism offers cryptographic evidence of possession transfer prior to the deletion of the sender's key, enhancing security during transactions. The protocol also features a 'pending_transfer' state that allows either party to cancel a transfer without financial loss and an NC1 security gate that prevents key deletion unless specific conditions—such as cryptographic receipt verification and on-chain Unspent Transaction Output (UTXO) confirmation—are met.

From a technical perspective, the system emphasizes robust security by storing keys within secure hardware enclaves like Android’s Keystore and iOS’s Secure Enclave, ensuring they are shielded from external threats and extraction under normal operating conditions. The proof of concept for this protocol was demonstrated on Bitcoin Signet, with key milestones like batch funding and peer-to-peer transfers being successfully recorded.

However, certain elements remain unimplemented or are in development stages, including bounded UTXO sets, offline verification capabilities, multi-node UTXO querying, Near Field Communication (NFC) and near-field transport bindings, and an upgrade path to P2TR/MuSig2. Open queries about the protocol seek feedback particularly on the NC1 gate's sufficiency in covering potential attack vectors and the feasibility of alternative strategies for physical instruments that might not support buyer-generated keys as effectively as digital solutions. For a deeper understanding of the protocol’s specifications and ongoing developments, interested parties can access the full paper here and explore the working application at Kagikai App.