Hi Bob,

Looks like we're largely thinking along the same lines.

It's unlikely that a party sending a UTXO to another party will have a UTXO of exactly the right size that's needed

My original proposal uses adaptor signatures to ensure swapping UTXOs is atomic. All parties choose a secret, then they all make adaptor signatures, then they reveal their secret to the statechain entity. The SE then publishes the signatures, causing everyone to learn the secret. And if the SE doesn't publish, it simply means the transfer didn't occur.

But taking a step back and thinking about an MVP, it may be easier to make it more like a fully audited transparent blockchain where multiple users create a combined transaction of all the UTXOs they want to swap, which is published together with all the corresponding Bitcoin transactions. Then adaptor signatures aren't needed.

The downside of that method is that you lose the ability to only validate the history of the coins you hold (scalability win). For this to be possible, you need to keep the history of every individual UTXO completely separate. I still think that is where we eventually want to end up (as well as having blind signatures), but it adds a lot of complexity (adaptor signatures, sparse merkle trees with non-inclusion proofs...).

The natural solution is to decompose your outputs in a binary decomposition

I fully agree, but on top of that I think we also need Lightning, because....

This same mechanism can also be used to pay the SE for its service through a different UTXO than the one being transferred.  

My conclusion was that opening a Lightning channel on top of a statechain makes more sense for this (as ZmnSCPxj explained in his reply to you). If we expect BTC fees to go up, we can't expect the statechain to hold UTXOs that are small enough to be used to pay for statechain fees.

More on this in my Breaking Bitcoin 2019 talk (timestamped link): https://youtu.be/09HcYRjDkMA?t=850

a logical enhancement would be to use some kind of single-use seal

Any kind of system where users transfer ownership through signatures will resemble single-use seals, so I'd say that's inevitable! :)

Cheers,

Ruben

On Sat, Mar 28, 2020 at 3:42 AM ZmnSCPxj via bitcoin-dev <bitcoin-dev@lists.linuxfoundation.org> wrote:

Good morning Bob,

> Big picture, it seems to me this idea is workable and very interesting. I see
> three likely enhancements that will be necessary or desirable:
> 1. Atomic swap of multiple UTXOs, and binary decomposition of value in lots
> 2. Key exchange ("addresses") to facilitate a secure comms path from
> sender -> receiver
>
>     3. (Optional) single-use seals to close old state
>
>
> (1) It's unlikely that a party sending a UTXO to another party will have a UTXO
> of exactly the right size that's needed, already locked into the statechain. If
> he has to create the UTXO first and then lock it into the statechain, the
> statechain solution is no better than an on-chain send. And once the receiver
> has the UTXO, it's unlikely that he will want to send exactly that same amount
> to another receiver later. This isn't a problem in Lightning where amounts can
> be arbitrarily updated. As a consequence, I think Lightning is more valuable for
> small-value payments, and statechains will be more valuable for larger values.
>
> The natural solution is to decompose your outputs in a binary decomposition,
> having e.g. UTXOs with 1048576 satoshis, another with 2097152 satoshis, and so
> on. Then when I want to send, I select the appropriate UTXOs as a binary
> decomposition of the value I want to send, with a "lot size" of 1048576
> satoshis, or the dust limit. The notion of "lots" like this is common in
> traditional markets...many stocks are bought and sold in lots of 100, and forex
> is traded in lots of $100,000. Users of a statechain therefore need log(V)
> available UTXOs locked into the statechain, where V is their value in BTC.
> Having fixed lot sizes like this also makes coinjoin-type uses more viable. The
> statechain could also assist in dividing a UTXO into two utxos of the next lot
> size down, so that I have the right UTXOs to hit the value I want to send.

My understanding of statechains is that nothing prevents the statechain from internally having multiple UTXOs divided from a single large onchain UTXO.

Indeed, a statechain can act much like a federated blockchain, and the interface to the statechain could be for its clients to send a Bitcoin transaction to it spending 1 or more of the UTXOs currently instantiated inside the statechain.
Then the statechain validates the client Bitcoin transaction, updates its state and republishes it to its clients, removing the (internal-to-statechain-only) UTXOs spent, and inserting the new UTXOs of the incoming transaction.

For example, suppose I have a 1BTC onchain UTXO that I use to create a new statechain:

    [funding tx]->1BTC(SE)-+  (onchain)
    _ _ _ _ _ _ _ _ _ _ _ _|_ _ _ _ _ _ _ _ _ _ _ _
              (statechain) |
                           +->[update mechanism]->1BTC(ZmnSCPxj)

Then I send to the statechain a transaction spending my 1BTC-on-statechain, giving you 0.11568768 BTC:

    [funding tx]->1BTC(SE)-+  (onchain)
    _ _ _ _ _ _ _ _ _ _ _ _|_ _ _ _ _ _ _ _ _ _ _ _
              (statechain) |
                           +->[update mechanism]->1BTC(ZmnSCPxj)->[tx]-+->0.11568768BTC(bsm117532)
                                                                       +->0.88431232BTC(ZmnSCPxj)

The statechain verifies that the tx I sent is valid, then outputs the next state as below:

    [funding tx]->1BTC(SE)-+  (onchain)
    _ _ _ _ _ _ _ _ _ _ _ _|_ _ _ _ _ _ _ _ _ _ _ _
              (statechain) |
                           +->[update mechanism]-+->0.11568768BTC(bsm117532)
                                                 +->0.88431232BTC(ZmnSCPxj)

In short, statechains can be implemented as a sort of super-transaction-cutthrough system.

This prevents the onchain UTXO from having a single logical owner, of course, so onchain it is the statechain entity that owns the entire fund, but if you are trusting the statechain entity anyway, the update mechanism is sufficient to ensure that nobody (other than the trusted statechain) can prevent the publication of the latest accepted state.

This is probably significantly more efficient than splitting up the 1BTC value to multiple lots.

I think this framework will work for all offchain mechanisms (CoinSwap, Lightning, statechains), by the way --- you can always view the offchain update mechanism as logically implementing a "new" cryptocurrency system that maintains UTXO sets and allows removal and insertion of UTXO sets according to the same rules (sans relative-locktime) as the hosting cryptocurrency system (i.e. the blockchain).
The same realization is what underlies channel factories as well --- the hosting cryptocurrency system need not be a blockchain, it can be just another cryptocurrency system (of which a blockchain is just one kind).

My understanding is that the original description, which describes transferring the entire value inside the statechain to a new owner, was only for exposition and that it was an exercise for the reader to consider how a statechain can internally split the total value among multiple UTXOs.

Regards,
ZmnSCPxj
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