Final week I touched on the nuances and complexities of “Trustodial” systems, methods that may’t be totally categorized as non-custodial or custodial, and the way this causes points when it pertains to us categorizing completely different instruments on this area. This isn’t the one situation being oversimplified usually dialog because it pertains to categorizing methods of utilizing Bitcoin.
One other main issue, with its personal bag of complexity and nuances, is the price of self custody.
I laid out these two core necessities for one thing to be thought of self-custodial within the final article:
- A consumer has unilateral management over their funds, or the power to regain it.
- No different occasion (or events) has the power to stop the consumer from spending their funds, or regaining their skill to, or to spend them with out the involvement of the consumer.
Let’s add one other core requirement:
- A consumer should be capable of affordably exert their management over their funds, i.e. it should not price an inordinate share of the funds beneath their management to truly transact with or implement their possession over them.
If a consumer has declare to some funds via some enforcement mechanism, however it could price 95% of these funds to truly train that enforcement mechanism, does he even have self custody of these funds?
The Core Drawback
This is without doubt one of the chief scaling limitations of present Layer 2 designs, resembling Lightning, Statechains, Ark, and so forth. Any Layer 2 that makes use of pre-signed transactions to operate is topic to this downside. Bitcoin has a blocksize restrict, and each time the pending transaction demand within the mempool is bigger than the throughput capability of the blockchain, charges go up. We now have no mechanism, regardless of what some massive blockers would possibly say, to keep up a relentless low charge degree for customers. Blockchains don’t scale with out destroying their core worth propositions.
This leaves us with no possibility however to assemble off-chain scaling mechanisms, and to this point the one viable trustless and self custodial answer is to make use of pre-signed transactions to facilitate this. That implies that if a consumer ever has to truly make use of these pre-signed transactions, they should pay the charges for them.
Due to this, the construction, dimension, and variety of transactions which can be essential to implement possession are the deciding elements relating to the price to implement possession claims on-chain. The extra complicated the script, the bigger the transactions, the upper the variety of transactions vital, the costlier it turns into to implement possession. All of those elements finally add as much as create a minimal viable worth to self custody with these methods.
If it will price 10,000 satoshis to implement possession on-chain, then the thought of holding lower than 10,000 satoshis in that system is simply economically irrational. You’d pay extra in charges than the worth you have got a declare to is value. Even 10,000 satoshis is simply too small in apply, would you wish to pay 100% of the worth you have got to be able to truly implement possession?
To be realistically affordably self-custodied, the worth being secured have to be some comfy a number of of the price to implement it, say 3-5x. If it isn’t, then that worth can’t truly be enforced on-chain, will probably be eaten by charges if somebody tries.
However It’s Not Custodial Both
Identical to Trustodial methods, this introduces an ambiguous grey space. After contemplating the brand new third requirement to be thought of self-custodial, a small worth under the charges required to implement it on-chain is clearly not self-custodial, but it surely’s not custodial both. Whereas the rightful proprietor won’t be capable of affordably implement their possession on-chain, no matter occasion they’re interacting with in a Layer 2 protocol can’t affordably steal it both.
This creates a form of Mexican stand off relating to decrease values secured on what would in any other case be unambiguously self-custodial Layer 2s. The rightful proprietor can’t affordably implement their possession on-chain, however as a result of every other customers collaborating within the Layer 2 can’t as nicely, they haven’t any optimistic incentive to attempt to steal it through the use of outdated off-chain state transactions or refusing to cooperate to replace balances off-chain. They will burn the rightful proprietor’s cash by forcing them to submit transactions on-chain, however they achieve nothing themselves in doing so.
This creates a dynamic the place so long as the concerned events proceed cooperating, these small values may be utilized and exchanged off-chain, however within the occasion that cooperation breaks down these small worth balances basically evaporate after they can’t be affordably enforced on-chain.
It Will get Worse
This downside is exacerbated in two methods. The primary is charges going up. The larger the transactional demand is for blockspace, the upper the feerates go, making the minimal viable self-custodial worth larger. That is an unavoidable consequence of demand for Bitcoin growing (so long as that demand is for bitcoin itself and never custodial balances with some service).
The second is definitely a outcome of the present options for the primary downside. The upper feerates get, the costlier on boarding and off boarding from Layer 2s will get, necessitating arising with designs that enable extra folks to share a person UTXO, permitting on-chain charges (at the very least within the cooperative state of affairs) to be unfold between extra folks. This requires utilizing both bigger transactions, or extra transactions, typically structured as bushes that break up up funds till finally distributing them to particular person customers, to account for extra customers.
Which means that not solely has the baseline charge for a single transaction gone up, however customers must pay charges for both bigger than common transactions or multiple transaction to implement their possession in non-cooperative conditions!
So What Do We Do?
To inform a harsh fact, this could be a basically unsolvable downside, at the very least within the scope of sustaining a safety mannequin that is kind of the identical as Layer 1. The crux of the issue comes right down to this: in larger charge environments the price to implement possession on-chain goes up, necessitating discovering methods for increasingly folks to share a single UTXO. Whereas decreasing the charges to make the most of funds within the cooperative case, this will increase the price (magnified by regardless of the larger feerate is) within the noncooperative case. Nevertheless, the power to train the noncooperative case is what truly enforces possession.
As of proper now, the most effective we are able to do is use extra blockspace environment friendly methods to implement possession noncooperatively. This is able to imply new opcodes, particularly covenants, that might enable a single consumer to withdraw their share of funds from a shared UTXO whereas on the similar time guaranteeing that the remainder of the funds return into the covenant to make sure different customers can do the identical.
This might forestall creating the issue of extra customers requiring extra transactions to implement possession, but it surely nonetheless doesn’t take care of the basic downside of feerates going up themselves. Even within the theoretical greatest case a consumer would nonetheless must make a single transaction to implement their possession over funds, and in larger feerate environments that might be costlier. That is the side that could be basically unsolvable.
Whether or not solvable, insolvable, or someplace in between, it is a dynamic that’s essential for customers to grasp. It’s a grey space through which issues can go mistaken, and when issues go mistaken it may end up in customers dropping their funds.
