Ecash (cashu or fedimint) are custodial layer two.
Lightning is non-custodial layer two.
?
Discussion
Casey specifically might be thought of as a layer 3 because you move in and out of it with lightning
Lightning is layer two as can be settled onchain directly.
Custodial ledgers and ecash mints are equivalent in the sense that there is no direct (meaning trustles) settlement to chain or LN.
They can be viewed as an alternative closed system or maybe as layer 3 (for the trusted conversion) depending on the definition.
By this view a mint or custodial LN wallet supports the base layer or LN only on the level of the custodian. The users transact intraledger and can swap out in a trusted fashion.
In short: a custodial system is more like an alternative rather than a layer on top.
But isn't this encapsulated in "custodial" layer two?
Or is the word "layer" the problem?
Yes, a custodial system doesn't feel like a layer to me as none of the base layer rules apply.
So, liquid is not a layer two?
No, it is a sidechain. Different rules apply and can't get out without permission or trading.
Is there a difference between the originally envisioned two way peg sidechain, and the actually deployed liquid federated sidechain?
I think in liquid, ultimately the federation can stop the withdrawals, just like in fedimint.
What exactly are those rules of a sidechain, that would make liquid meaningfully different from fedimint in a custodial context?
Agree that the two way peg in Liquid is not permissionless. That is what it does not make it a real layer 2 according to the thinking above vs lightning, but this is only difference in semantics.
Re the practical differences between the Elements sidechain and an ecash system it is interesting to thinking that the outcome is quite similar, but there are fundamental differences due to the tech used - blockchain vs ecash.
On Liquid
- the supply can be audited (however more complicated than on bitcoin due to CT)
- need to wait for blocks (1 minute only)
- IBD requirement
- UTXO model (CT hides the amounts)
- and most importantly it is almost prohibitively difficult to start a new Elements sidechain
Ecash mint:
- proof of reserves is not figured out yet (interactive, maybe with key rotations etc)
- fast as only depends on the mint
- better privacy with tokens of fixed denominations which are not connected in any way
- easier to deploy
I am sure there are many other nuances.
My subjective perception is that I would be more comfortable with Liquid for higher amounts or longer time, but for the transactional use ecash seems to be very promising (just like custodial LN wallets have the best UX currently - but without privacy from the custodian).
Spot on.
Yes, the custodian takes any money as deposit, it can be base money onchain or lightning, or even other fiduciary media like custodian database or ecash token.
Cashu is layer 3 (don't tell Calle), as it settles to layer 2 - Lightning. Doesn't matter it the settlement requires cooperation of a third party or not.
Fedimint imho is Layer 2, since it natively settles to Layer 1 (on-chain Bitcoin)
Some interesting conversations in this thread
#[2]
Yeah, federations can in theory rugpull, but you lightning balance is also not fully secured until onchain settlement.
Your lightning node can break down like a bank can go bankrupt and then funny stuff can happen.
If you run your lightning node software correctly, nobody can steal from you.
If you run your ecash/liquid client software correctly, the mint/federation can steal from you.
I think this is a bit of the same topic, but I'm really just testing the #nostr link feature (sorry):
@note1xm0tjtnknnw65tj4gxlaxrmqzdxcxgmz3697uv06m63pcyfwda8qkq0vmd