[Proposal] Bitcoin Deposits: A Zero UTXO Trust-Minimized Lightning Wallet

This new protocol seeks to provide users with complete control over their private keys, enable Lightning payments without the need for Unspent Transaction Output (UTXO) fees, and remove the requirements for liquidity management and constant availability. From an operator's perspective, the protocol is designed to open up a larger market, offer competitive fee structures similar to Lightning Service Providers (LSP), and allow operations without a public IP address through a model that compensates for inactivity.

The foundation of this system lies in its ability to build upon the consensus mechanisms of existing Lightning channels while introducing novel features such as prohibiting unilateral exits to ensure that funds remain within the protocol indefinitely. A unique aspect of the protocol is the creation of a network where operators cross-validate deposit updates, facilitating communication through the Lightning Network and Nostr Wallet Connect. This approach envisions a future where the current infrastructure supports a massive expansion of Bitcoin adoption.

An illustrative scenario provided explains the operational mechanics involving two nodes, Vault and Wallet functionalities, highlighting the roles of participants like Mallory, Charlie, Victor, Alice, Bob, and Chad in various capacities - from creating and validating outputs to managing and recovering deposits. The narrative outlines the process from establishing a validated output channel, making payments, and attempting recoveries after fraudulent activities, to the eventual realization of a more secure system through auditor intervention and over-reserves management.

A critical part of this protocol is the recovery mechanism which engages when a node acts dishonestly. Auditors play a significant role in maintaining the integrity of the system, acting not only as watchtowers for unilateral or any form of closures but also in reallocating funds post-theft attempts based on a comprehensive ledger maintained by channel partners. This ensures that even in scenarios where nodes go rogue, the funds can be securely redistributed to maintain trust among users.

In essence, the proposed Layer 3 protocol introduces a sophisticated framework aimed at enhancing the security, efficiency, and scalability of Bitcoin transactions via the Lightning Network. By addressing current challenges through innovative solutions such as trust-minimization, cross-validation networks, and strategic recovery processes, it holds the potential to significantly impact the future landscape of cryptocurrency operations.

For further details about this project, visit Deposits by Ynniv, explore the technical documentation on GitHub, or access additional resources through provided links like Njump.me and X.com/ynniv.