I want to know the risks involved in fedimint? Fedimint is something that was shared as improving privacy for bitcoiners.
If implemented as described, Fedimint implements Chaumian E-Cash operated by a Federation. When users deposit funds, the Federation takes custody of the deposit. In return, the Federation issues fungible eCash notes that can only be redeemed once with the Federation. When eCash notes are redeemed, the Federation in exchange issues either a withdrawal or new notes. Beyond each note only being usable once, the notes are not distinguishable to the Federation.
As I understand it:
- The Federation operating the Fedimint has full custody of all users funds. They could lose the funds or be forced to turn them over.
- Observers of the deposits to the Fedimint may learn about its users per the deposits and withdrawals
- The Federation may be able to learn something about some users by logging IP addresses of users and watching spending patterns of eCash notes
- The Federation can probably not selectively censor a sufficiently motivated specific user within the system, since the eCash notes are fungible, but could stop redeeming any eCash notes
- The Federation could censor withdrawals to specific addresses or Lightning nodes outside of its system
- If the members of the Federation collude, they could run off with all user deposits
Fedimint has a doc on this.
Clearly there is a trade-off from self custody onchain but community custody is not the same as leaving your funds on a large (generally KYC) centralized exchange from either a security perspective or a privacy perspective. To what extent the community is superior to the exchange would be determined by your assessment of the community you are trusting.
With Lightning too there is this concept of a "Uncle Jim" where a trusted relative manages a family's Lightning channels so that not every individual has to worry about liquidity and understanding the intricacies of the Lightning Network. That model might not be for you either but depending on you and your family's skillset that may be of interest.
Christian Decker went through some of the various custodial and non-custodial Lightning node setups at Advancing Bitcoin 2022.