Today, open source software developer Luke Childs published a concept of a ‘trustless trust fund’ that can be established using only Bitcoin code.
Because Bitcoin is decentralized, it can be used to create financial transactions between people who are not dependent on a third party. But in this case, it is used to replicate a financial tool known as a trust fund.
The idea is to allow an abstract grantor (in this case “mom and dad”) to set aside and save some of their money for a beneficiary (child), who will only be unlocked when a some specified conditions are met (when the child reaches the age of 18) – with only Bitcoin code. No help from third parties is needed.
“The idea is that Mom and Dad put some money away at an address with the above spending condition. Mom, dad and child each have their own key. Once mom and dad have committed to the fund, they cannot withdraw. But they can make an extra contribution in the future, ”explains Childs.
In this context, if the child wants to withdraw money before the age of 18, it can do so with the permission of one of the parents. Later, when the child is eighteen, they gain full control of the money without a signature from the grantors.
The framework also allows the parents to set multiple dates for unlocking the trust fund rather than just one. They just need to repeat the steps and send different amounts to each address, setting up a few funds instead of just one.
“It’s really cool that such contracts can be implemented natively in Bitcoin!” Childs added.
Bitcoin’s code even makes it possible to create future-proof situations, such as donors dying or losing their keys, and it also acts as an inheritance mechanism (although funds can still be forfeited if both parties lose their private keys).
Why would you even want a Bitcoin trust fund?
While traditional trust funds are an established and useful form of asset management, they usually also involve many hurdles and drawbacks. One of the main disadvantages of using a trust is the cost of setting it up, as the procedure often requires quite expensive legal assistance.
In addition, managing the trust can also be costly, since many trusts are managed by banks and other financial institutions. And even if the trustee is a private party, they can still claim reasonable compensation for their efforts.
Trusts are often much more complex to construct as well, as they can be paid out at certain intervals or allow the trustee to decide when the beneficiary can withdraw the funds. The trustee may also need to register a trust control account.
In addition, despite a popular belief, trusts do not offer specific tax breaks and can become a source of many inconveniences. For example, banks and financial institutions may create additional barriers and require different administrative procedures if trust assets are used as collateral for a loan or other financing.
Not to mention the ‘human factor’ that can lead to many conflicts – legal or personal – between beneficiaries and administrators if they just don’t like each other, for example.
And just think that all these problems can be avoided with a few lines of Bitcoin code – with basically the same results.