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Read_872 - Erosion of the Meaning of Custody
00:30:26
Nicholas Dorier brings us a short piece that is very relevant to many of our challenges today, being clear and precise about the definition of the word custody. As we have seen for decades, the political sphere is almost designed to destroy and confuse the definition of words for the explicit purpose of broadening power, and creating enemies and criminals of anyone who gets in their way. But an even greater dilution of the term has come from within, as new "layer 2" systems compete to be seen as the next major leap forward. Are they really, or are we losing a key definition that could bring more consequences than we may admit...? Let's dig into it. Check out the original article Read_872 - Erosion of the Meaning of Custody by Nicholas Dorier (Link: https://tinyurl.com/44xdbhwe) Host Links Guy on Nostr (Link: http://tinyurl.com/2xc96ney) Guy on X (Link: https://twitter.com/theguyswann) Guy on Instagram (Link: https://www.instagram.com/theguyswann) Guy on TikTok (Link: https:/...
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We've seen this pattern before. First a law targeting terrorists, then a gradual expansion of the definition until one.
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Day someone saying something offensive online is.
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Labeled a terrorist under the new terms. Interestingly, this push to broaden the definition of custody isn't even coming from regulators. It's being driven by overly zealous protocols attempting to define what a Layer two solution is hoping to associate themselves with the success of the Lightning network. So here it is, a strict, uncompromising definition of custody. The best in Bitcoin made Audible I am Guy Swan and this is Bitcoin.
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Audible Foreign what is up guys? Welcome back to Bitcoin Audible I am Guy Swan, the guy who has read.
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More about Bitcoin than anybody else you know.
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This show is brought to you by the Jade plus Hardware wallet by Blockstream. This is a fantastic little wallet I have gotten to play with a lot in the last couple of weeks. I just released another video on the basic setup and walkthrough and for those of you who don't like to watch like a 9 or 10 minute video that goes into all of it and kind of step by steps your way through and you know, provides commentary, I also will be doing for my tutorial type videos, I'll be doing a TLDR right at the beginning that like bangs it out in like 50 seconds. So check that out if you haven't, or if you have just got your J and you haven't set it up yet and you know, check on the seed words. Maybe, maybe. I don't know, I don't know, maybe there's something there. This episode is also brought to you by the Bitkit Mobile Wallet on Chain and Lightning in one interface that is super intuitive, easy to use and it just works. And also you have a peer to peer contacts list which is super freaking cool, is the only other system that I've been really, really interested in alongside nostr. Check it out if you haven't because it's going to be related to Pub Key, which we've been talking about. All right, so we have a read today. This is a short one but I.
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Also think it's really important.
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It's really important because, well, the title says a lot about it. It says the erosion of the meaning of custody. And I think there's a lot when you get into these higher order or the higher layer systems and we're talking about protocols that depend on other protocols or actions in a lightning channel that depend on something that happens on chain.
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And you're getting into derivatives of other.
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Things that have certain nuances or certain behaviors and combinations of keys and time locks. You start finding gray areas very quickly where things don't quite work out. So black and white as to who has control when and under what conditions. And especially with, you know, the case around the Samurai Wallet developers and the Tornado Cash developers, this is a really.
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Really important distinction to make.
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This is something incredibly important to make.
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Sure there is no ambigu about what we mean and what one layer two is and who owns what and who controls what. And what does custody mean in the context of Bitcoin?
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Because it means something very different in the context of fiat land because everything is a form of credit, right? Everything.
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You can't custody anything in fiat land outside of holding a gold bar and holding cash, which is still a little.
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Bit questionable because you don't, you don't control any of the rules of the dollar.
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These things are really important to define.
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Especially as we get into a place where regulatory definitions could have huge effects to the positive or the negative for builders and service providers in this space. So with that, I wanted to read Nicholas Doria's piece who we've done a number of different pieces from him on the show before. Always a fan of Nicholas and his writings about privacy and a bunch of other great things in the past. I will try to drum up a couple of the good ones and have them as links in the show notes. But with that we'll cover the rest in the guys take to follow. And let's get into today's read and.
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It'S titled Erosion of the Meaning of Custody by Nicholas Dorier. Introduction the loose use of the term custody is in my opinion, very dangerous. If you strongly value the freedom Bitcoin provides, you should fight to preserve its meaning. Broadening its definition risks inviting regulations that could eventually ban non custodial solutions. We've seen this pattern before. First a law targeting terrorists, then a gradual expansion of the definition until one day someone saying something offensive online is labeled a terrorist under the new terms. Interestingly, this push to broaden the definition of custody isn't even coming from regulators. It's being driven by overzealous protocols attempting to define what a layer two solution is, hoping to associate themselves with the success of the Lightning Network. So here it a strict, uncompromising definition of custody. The definition Imagine going to a shopping mall. It's your wife's birthday and she wants to buy a new bag. You decide to pay. You take your wallet from your pocket and then hand out the cash to the cashier. In this case, it's obvious that no one would claim your wife is a custodian. Why? Because you can still use your wallet without needing her permission. Now consider a different scenario. You don't want to carry your wallet, so you hand it to your wife who puts it in her bag. Later, you pass a store and see a bottle of wine you'd like for tonight. You ask your wife for the wallet and then use it to pay the cashier. Here, your wife is undeniably a custodian. You can't use your wallet without first asking her. The fact that she might always agree to give it back is irrelevant. The key point is that you can't spend without her consent. This lack of independent control means there is no unilateral exit, as Bitcoiners would put it. As Cali wrote, either you have unilateral exit to the chain or it's custodial, sometimes a sugar coated version of it. Unilateral exit implies non custody. Non custody implies unilateral exit. Those are synonyms. Those who use the term layer 2 to include custodial solutions are essentially implying that your Kraken account is also a layer two. This dilutes the term to the point of rendering it meaningless, much like the term blockchain which became a red flag after being misused and overhyped by shitcoiners for years. There is no such thing as semi custody. There is no ambiguity. Litecoin replied to what do you call a state chain which has unilateral exit and the operator can collude with a prior key holder to steal? To which Cali answered non custodial. Similarly, lightning force close with mempool pinning attack or bad fee spike, etc. My pedantic definition includes an almost always for unilateral exit. I strongly disagree with this response. While the conclusion is correct, the reasoning is not and would lead to a diluted meaning of custody. We need to address the two points separately. One Protocols allowing third party collusion to steal funds and two Protocols that may fail under external circumstances, huge fee spike or pinning attacks. About third party collusions, what about protocols like statechains or even ark? Are they really non custodial? If collusion might lead to the theft of funds, the answer is an uncompromising yes. Lets consider a real world analogy. You know that Netflix can raise its subscription price without asking your permission every month. You continue paying unless you cancel. They don't need your consent to withdraw funds once you've subscribed. Would anyone claim that Netflix is A custodian because it has the ability to charge your account. Is there a unilateral exit? No, there isn't. Of course, you can ask Netflix to stop charging your account or instruct your bank to block payments, but you can't stop it without asking someone. If there is no unilateral exit, by our definition, there must be a custodian. The subscription involves three you, your bank, and Netflix. There's no unilateral exit because custody exists and the custodian is is your bank. Once again, when there is no unilateral exit, there is custody. If there is custody, there is no unilateral exit. Now back to Bitcoin. If a protocol like Statechains or Ark allows theft through collusion as part of its security model, does that imply custody? No, because unlike the Netflix example above, there is a unilateral exit. Therefore, there cannot be a custodian about external circumstances. Unilateral exit might become impossible due to factors server downtime, network congestion, high fees attacks, for example Mempool pinning, accidental key loss, for example Your cat erasing your keys. Let's revisit the shopping mall analogy. You have your wallet in your bag and decide to store the bag in a locker at the mall, keeping the key. Later, you try to pay at a shop, but you realize your wallet is in the locker and worse, you've lost the key. At this moment, the coin locker owner effectively becomes a custodian. You now depend on them to grant you access to your wallet. Without their help, you cannot retrieve your funds. Regardless of the security protocols in place, the situation is functionally no different from relying on a bank's vault. The loss of unilateral access transforms the relationship. Custody now exists because you no longer have the ability to act independently. Fundamentally, non custody means the user retains full sovereignty over their funds. This inherently includes the ability to transfer or lose that sovereignty, whether voluntarily or not. Even mechanisms like covenants cannot entirely prevent this, as sovereignty implies ultimate control, including the choice or mistake to relinquish it back to Bitcoin. While a protocol may be non custodial, circumstances can still reintroduce custody. This stems from the very nature of ownership. The only thing we can objectively evaluate is whether the protocol itself is non custodial. As we've established, so long as a unilateral exit exists, the protocol is non custodial. External circumstances should not factor into this determination, as ownership is always alienable by definition. As a libertarian would argue, the only truly inalienable ownership is over your body and will. But I digress. Custodial Implementations as we've seen, it isn't possible to prevent the use of a non custodial protocol in a custodial way due to the very nature of ownership. An interesting argument compares a custodial implementation, Wallet of Satoshi, to a non custodial one like Phoenix. The claim is that in both cases, if the servers behind Phoenix or Wallet of Satoshi disappear, the funds become unspendable. Thus, Phoenix is argued to be as custodial as Wallet of Satoshi, even though it stores keys locally on your device rather than on a server. It might be tempting to counter this argument by pointing out that Phoenix allows you to backup the seed or channels. However, I believe this is the wrong approach. If Phoenix were the only implementation capable of interpreting those backups and and it became inaccessible, users would still be unable to recover their funds. The correct argument lies in the possibility of a unilateral exit even if the servers go down. Even if Phoenix didn't provide an export option for backups, as long as all necessary data remains on the user's phone, it is still possible to achieve a unilateral exit. This distinction is critical, and it's why I've emphasized the word can in earlier examples. The capacity for unilateral exit is what defines non custody. Whether the user has the technical knowledge to execute it is irrelevant. What matters is that they can, or that someone else could assist them in doing so. Conclusion I hope I've successfully made the case for a strict and uncompromising definition of custody with this article. I hope to encourage you to confidently call out anyone misusing terms like custody or layer 2. Attacks on language often pave the way for broader confusion or manipulation, so it is crucial to stand your ground and defend clarity. Being aware of the security model of these protocols is still important because, as we've discussed, non custody doesn't mean you can't lose control of your funds. However, this is a broader topic and my focus here was solely on defining custody.
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Being extremely specific about definitions about what.
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A word means is very important and.
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I think this is lost on a lot of people and and just kind of hand waved away that oh, we can have words mean whatever the hell.
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We want them to mean.
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It's like, well no we can't because so much like these are these are foundational tools.
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A word, a language, is a foundational.
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Tool and we have tons of things built in layers on top. The idea that we are not clear about what a word means is it Very similar to not being clear about how a transaction clears or how a transaction is confirmed, or what a confirmation for a transaction means, and then trying to have Lightning or CTV or any other layer or system built on top of something like Bitcoin. When you are ambiguous about what the foundational tool or the, the element that.
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Makes it up is, or what it.
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Looks like or how it works. And when it comes to Bitcoin, it.
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Is hard to say that the word custody. There is a more important word than the word custody.
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And that's specifically why I wanted to read this article, is because I think Nicholas Doria does a fantastic job of recognizing the importance of that discussion because it's so easy to just be like, oh, whatever, custody means custody, you know. But the legal and regulatory environment are absolutely crucial for us to get that word right so that we always have a strong founding to argue from. If we can define custody for ourself.
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Then we can always argue from the.
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Position of our definition. And it's interesting to point out, or rather important to point out, is that the fiat world literally can't define custody like it is necessarily the case that they are not going to understand it because the entire idea of custody in the normie and the traditional financial system is kind of nonsensical because nothing can really be owned like this.
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Bitcoin is the first digital thing that can be owned.
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Therefore, our definition of what it means to have custody of our coins is actually extremely important in being very specific.
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And very precise about what it is that we mean.
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Because we are the first ones who have a digital asset or a digital.
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Unit of value that can be custodied by ourselves. And I really like the simplicity and.
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The clear boundaries around the idea of that.
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In the absence of anyone else, any other third party or any other thing.
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Happening, or fee spike or whatever, doesn't matter what happens.
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In the absence of anybody else's involvement.
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You can get your coins, you have.
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The keys or the information necessary in order to take your coins, no matter.
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Who is unavailable for comment or has no support line or whatever it is. And this is exactly why he uses the example of Phoenix. And I think that's. It's a great way to define the argument or kind of give edges to the argument, because Phoenix is a perfect example of, okay, well, they can quote, unquote, censor. They can't really censor. They can stop you from making a transaction on lightning in their wallet because they are your lsp, because they are. All of the transactions are routed through them.
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But you have the keys, you have.
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The pre image, you have everything in your app.
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You are running a light client.
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You are running a, a client with.
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All of the requisite keys and channel information on your device.
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And with Phoenix completely blowing up all of their servers, blowing up all of their keys, getting screwed, the CEO, everybody, everybody just vanishing in thin air. They, you know, fingers clicked and Thanos turns them all ashy and they blow.
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Away in the wind.
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You still have your coins. All you have to do is broadcast in a different way. They're not going, you're not going to be able to send a lightning transaction.
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But you can easily send an on.
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Chain transaction and take your coins wherever you want. In fact, you are the only one with control over those coins. And I specifically like this definition because it means that only if it doesn't mean that somebody else can't challenge it or that somebody else can't be a problem because it's in an ark or, or it's in a lightning channel or something else. It's not really about the fact that like everything is opportune in all situations or circumstances and at all times for you to unequivocally have immediate access to your coins, no matter what anyone else does or what the weather is like or what the fees or feeds fees.
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Are on the network.
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Because I specifically think that's less important, you know, because there's so many, so many times in which you could actually own the only key to a specific utxo and that can still present a problem in certain conditions. Like a great example is, let's say you own a 100,000 SAT UTXO, but fees spike to $98.
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Well, if your definition of custody means.
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That, you know, it can be a problem and you might not be able to get that value back out because of some other conditions or because of fees or because somebody else broadcasting something, well then you would have to say that because your UTXO is so small and the fee is going to cost you 98,000 sats for 100,000 sat UTXO to move. Well then now you're in this weird gray area where you're like, oh, but that's not, that's definitely self custody because of not really a great clear distinction. You're back to a lot of gray areas because the conditions are not necessarily.
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Are not necessary to be in your favor at any one particular time. The question is, do you have the ability to exit by yourself? Do you have the information, the keys, and can you produce the signature necessary for you by Yourself with no other participant there, can you take those coins?
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Can you broadcast a valid transaction that could confirm on the Bitcoin network? And I think that is the best way to define it.
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And it is the one that enables.
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All of the other potential benefits like privacy as a service and ARK payment services and pools where you can work together with somebody with state chains where you have the ability to exit and you still have custody of your coins, but someone else can provide a financial service for you without being a custodian. And I think that clear distinction, the ability to have that trade off, to.
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Place your own custody under a different set of conditions while still retaining your.
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Custody to get something like instant private payments or transfers and changes in liquidity for lightning channels within this large pool of other users.
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Or of course to connect into the.
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Lightning network because you used a lightning channel.
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But obviously you still have custody of.
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Your coins in the lightning channel because no updates occur without you having every single piece of information you need to sign in order to unilaterally exit.
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And because of this, it's also easy.
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To define the difference between certain sidechains.
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Liquid is not self custody. It is a better custodial model. It does distribute trust in a different.
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Way and across different layers. You can separate out jurisdictional trust, you can separate out institutional trusts, and you can basically dilute the risk of any one institution by essentially scaling up the.
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Risk higher, extending it at a higher layer.
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Is that okay? Well, you have to have explicit like international governmental risk or a risk that.
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Applies to a group of institutions rather.
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Than just one or one person. And so maybe it is a better custodial model, but it remains a custodial model. And another good thing about this definition specifically is that I think it recognizes.
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Or gives an easy way to frame.
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The discussion about layer twos in order.
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To know where the trade offs are acceptable.
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Using Lightning and ARC as a decent example, is the ARC trying to the ARK provider colluding with a past transaction.
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In order to prevent you from getting.
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Your your coins versus you not having the like you not being able to withdraw without the ARK provider's permission. Those are two different sets of circumstances. And I think it's. It makes it when. When you define custody properly, it makes it pretty clear what we would want the trade off to be. Because in the the first case you have to worry about or there is a situation in which you are being challenged if the ARK provide specifically malicious. Whereas in the alternative, whereas the situation where essentially you can't do it without their permission is that you have a problem with them if they are malicious.
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Or if they simply are not present or if they make an error. There's a whole nother list of things.
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Where you could lose your coins or simply never have access to them or have be censored from getting them that do not apply in the strictly self custody scenario where they are providing you with a service. And I think that makes a big difference about how you weigh the costs or the trade offs of something like ARK and distinguish ARK from some other alternative layer 2 system. And it also shows, at least in my opinion, it kind of demonstrates what the power of or why. I think the benefit of the primitive of a vault or a covenant type system is something like CTV is that it essentially gives you an avenue to know that you are always, you always have access to the keys, you always have access to the information necessary to withdraw your coins and that this can be done in a heavily like insanely batched way where there can be thousands upon thousands of self custody UTXOs behind a single UTXO. I mean in a sense that's actually what Arkansas accomplishes with connectors. It's just far more efficient and a much better system and a much simpler system if it has something like CTV and I believe also CFS C Checksig from sac. So csfs, if I remember correctly last time we had Burak on the show. But anyway, I just wanted to hit this piece because I think this is a really important idea to get the definition right because it really matters when we are talking about what is a true layer two, what is the goal.
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For layer two systems and how do.
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We be very clear about what the hierarchy of trade offs is regarding any, any system that we are using. And a shout out to Nicholas Doria. I haven't read anything from Nicholas or I haven't seen anything from Nicholas I don't think in a while and this was a good one and I think also a very timely discussion, which is probably why Nicholas had to bang out an article about it. Especially as the regulatory environment is becoming quote unquote more friendly and more active in the space being able to define that custody and clearly delineate what is.
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And is not custody if we can.
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Actually get that in the regulatory environment as well, according to the definitions that we are using when we are designing the protocol, the systems, the actual protocols that we are using. I just think it opens up so much clarity and lack of ambiguity in developing, in building and deploying software, in deploying services and that's a very, very critical thing. To have if we want really aggressive progress going forward and a really healthy market and ecosystem in any particular jurisdiction. So shout out to Nicholas for this one and I hope you guys enjoyed this episode. Thank you so much for listening. Do not forget to subscribe. This show grows because you guys share it out and I do not pay for marketing because I should, but I don't. But I've always just done good just keeping the show going and producing content because that's what I like to do. And thank you so much to everyone who boosts and stream sats on Fountain and on nostr and for everyone who uses my affiliate link. If you have not Speaking of if you had not gotten your jade plus you can get 10% off. Discounts are important. Do not leave discounts on the table. Use Code guy to get 10% off. It is a fantastic hardware wallet and specifically my favorite setup for the Jade.
- [28:42]
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Plus is Green wallet with Bluetooth enabled.
- [28:45]
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It's the sweet spot between you're separating your keys from the device, you can verify on the Jade plus screen what you are signing and all of the details you can. And it also just works. Communication is super fast, super simple. You just sit them next to each other and you confirm everything on both devices and you can broadcast. Great combo between secure and easy to use. And now if you are looking for.
- [29:08]
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Lightning that is easy to use and a wallet that has an intuitive design for both on chain and lightning and.
- [29:15]
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Swapping very quickly between the two and just having lightning work, that is the BitKit wallet.
- [29:21]
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B I T K I T. This is built by the guys over at.
- [29:25]
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Synonym with tons of other really cool peer to peer and decentralized stuff that they are working on. We've been talking about their pub key stuff a lot recently and that's actually really soon to I believe the public beta. I'm fingers crossed I'm going to have that any day now so I can start talking about that as well. So stay tuned. Don't forget to check them out, follow them and check out the bit. Hit wallet with that. Thank you all so much for listening and I will catch you on the next episode of Bitcoin. Audible and until then everybody take it easy. Guys.
- [30:13]
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The beginning of wisdom is the definition of terms. Socrates.