Explain the ecash protocol Cashu and how it works

Cashu is a privacy-focused ecash protocol built on top of Bitcoin, designed to enable fast, private, and scalable transactions. It leverages Bitcoin's Lightning Network and blind signatures to create a system where users can transact with digital cash-like tokens while maintaining anonymity. Here's a breakdown of how it works:

Core Concept

Cashu is an implementation of an ecash system, inspired by David Chaum's original ecash ideas from the 1980s. It allows a trusted entity (called a "mint") to issue digital tokens that represent value (in satoshis, the smallest unit of Bitcoin). These tokens can be spent or exchanged between users without revealing their identities to the mint or others, as long as the system’s rules are followed.

Key Components

Mint: A centralized server or service that issues and redeems Cashu tokens. It acts as the trusted intermediary in the system.

Tokens: These are the ecash units, digitally signed by the mint, representing a specific amount of satoshis.

Blind Signatures: A cryptographic technique that ensures the mint cannot link the issuance of tokens to their later redemption, preserving user privacy.

Lightning Network: Bitcoin’s Layer 2 scaling solution, used by the mint to settle payments in Bitcoin while keeping ecash transactions off-chain.

How Cashu Works

Here’s a step-by-step explanation of the process:

1. Minting Tokens (Acquiring Ecash)

A user wants to obtain Cashu tokens worth, say, 1000 satoshis.

The user generates a secret (a random number) and "blinds" it using a blinding factor (a cryptographic trick).

The blinded secret is sent to the mint along with a request for a 1000-satoshi token.

The user pays the mint 1000 satoshis via a Lightning Network invoice issued by the mint.

Once payment is confirmed, the mint signs the blinded secret with its private key and returns the signature to the user.

The user "unblinds" the signature using the blinding factor, resulting in a valid Cashu token signed by the mint. The mint never sees the unblinded secret, ensuring privacy.

2. Spending Tokens

The user wants to send 1000 satoshis to a merchant or another user who accepts Cashu tokens.

The user sends the token (the signed secret) to the recipient.

The recipient verifies the mint’s signature to ensure the token is valid and hasn’t been tampered with.

The recipient then submits the token to the mint to check if it has been spent before (double-spending prevention) and to redeem it.

3. Redeeming Tokens

When the recipient submits the token to the mint, the mint checks its database:

If the secret (token) hasn’t been used before, the mint marks it as spent and issues a new token of the same value to the recipient (or pays them out in satoshis via Lightning).

Because the original token was blinded during issuance, the mint cannot link the issuer (the first user) to the spender (the recipient).

This process ensures the token can only be spent once, much like physical cash.

4. Privacy Through Blinding

The use of blind signatures is key to Cashu’s privacy. The mint signs tokens without knowing their final form, so it can’t track who spends them or connect the issuance to the redemption.

Users can also split tokens into smaller denominations or combine them, further obscuring the transaction trail.

Advantages

Privacy: Transactions are anonymous as long as the mint doesn’t collude with external entities.

Speed: Ecash transactions are instant and don’t require on-chain Bitcoin confirmations.

Scalability: By operating off-chain (with Lightning for settlement), Cashu can handle many small transactions efficiently.

Cash-like Experience: Tokens feel like digital cash—spendable without a blockchain record for every move.

Limitations

Trust in the Mint: The mint is a central point of trust. If it becomes dishonest (e.g., refuses to redeem valid tokens or logs metadata), privacy or funds could be at risk.

Double-Spending Prevention: Relies on the mint to enforce this, unlike Bitcoin’s decentralized consensus.

Custodial Nature: Users must trust the mint to hold their funds and honor redemptions, unlike fully non-custodial Bitcoin solutions.

Real-World Use

Cashu is often implemented in wallets like Nutstash or integrations with Lightning hubs. For example:

A user might deposit Bitcoin into a Cashu mint via Lightning, receive tokens, and spend them at a merchant.

The merchant can redeem the tokens for Bitcoin or issue new tokens to other users, creating a circular economy.

Technical Underpinnings

Blind Signatures: Typically implemented using RSA or similar schemes, though Cashu uses a modern variant suited for Bitcoin.

Lightning Integration: Ensures the mint can settle with the Bitcoin network efficiently.

Database: The mint maintains a simple ledger of spent secrets to prevent double-spending.

In summary, Cashu combines cryptographic privacy with Bitcoin’s infrastructure to create a digital cash system that’s fast, private, and usable for everyday transactions. It’s a trade-off between decentralization (relying on a mint) and usability, making it a practical tool for privacy-conscious Bitcoin users.

Is cashu ecash non-custodial?

Cashu ecash is not fully non-custodial, though it has some non-custodial elements depending on how you define custody in this context. Let’s break it down:

Why Cashu Is Partially Custodial

Mint Holds the Funds: When you "mint" Cashu tokens, you send satoshis (via Bitcoin’s Lightning Network) to the mint, and in return, you receive ecash tokens. The mint effectively holds the underlying Bitcoin value until someone redeems those tokens. This means you’re trusting the mint to honor the tokens’ value and not abscond with the funds or refuse redemption.

Redemption Dependency: To convert your Cashu tokens back into Bitcoin (or to pay someone else who then redeems them), you or the recipient must interact with the mint. If the mint goes offline, becomes dishonest, or shuts down, you could lose access to the value represented by your tokens.

Centralized Trust: The mint is a trusted intermediary, akin to a bank in traditional ecash systems. Unlike Bitcoin, where you control your private keys and funds directly, Cashu relies on the mint’s integrity and availability.

Non-Custodial Aspects

Token Possession: Once you have the Cashu tokens (the signed secrets), you hold them directly, much like cash. You can transfer them peer-to-peer without the mint’s involvement in the transaction itself. This gives you custody of the tokens—not the underlying Bitcoin.

Privacy: Thanks to blind signatures, the mint doesn’t know who you are or how you spend the tokens, offering a layer of control and autonomy over your transactions. This feels non-custodial in terms of privacy, even if the funds’ backing remains custodial.

Comparison to Bitcoin

In Bitcoin (on-chain or Lightning), you control your private keys or payment channels, making it fully non-custodial—nobody else holds your funds unless you delegate custody (e.g., to an exchange).

In Cashu, the mint controls the Bitcoin backing your tokens, so it’s custodial at the level of the underlying asset. You only have custody of the ecash tokens, which are IOUs redeemable at the mint.

Practical Implications

Risk: If the mint operator disappears or turns malicious, you’re left with worthless tokens, similar to a custodial wallet failing. This is a key distinction from non-custodial Bitcoin solutions.

Trade-Off: The custodial nature enables Cashu’s privacy and scalability features. Without a mint to issue and verify tokens, the blind signature system wouldn’t work in this form.

Conclusion

Cashu ecash is custodial at its core because the mint holds the actual Bitcoin while you hold tokens representing that value. However, it offers non-custodial token usage in the sense that you control the tokens themselves and can spend them privately without further mint involvement until redemption. If your definition of "non-custodial" requires full control over the underlying funds (like Bitcoin private keys), Cashu doesn’t meet that standard. It’s a hybrid system, balancing privacy and convenience against the need to trust the mint.