Litecoin as a bank communication protocol: avoid short term Credit.

Recently I had been thinking, all reports of LTC's demise aside, that litecoin could prove itself to be very usual in ways other then just as a coin.

The nature of the blockchain (universal transaction records confirmed by many nodes) could make it very useful as an secure form of communication that could be used to remotely control BTC wallets and to build a secure BTC banking service that does not rely upon short-term credit (BitInstant) to secure guarantee instant transactions.

<-- My thinking is listed below, for the people who like to get to the details straight away, here is my implementation, roughly sketched -->

1: Individuals would sign up to a Bitcoin Service (like instawallet for example), they would have custom BTC software on their device. However their BTC wallets would be stored on a server of the wallet provider, not the device.

2: The BTC software on the device would not actually control a BTC wallet, rather it would only display the current Balance of their BTC wallets as stored on the server and the device software would include an implementation of LTC.

3: The device would actually use LTC when conducting transactions. When signing up to the service, the wallet address would be registered with the service and serve as the device identifier.

4: The Service Server would control the BTC wallets via a custom client. Controlling the BTC wallet to send coins would require multiple factor verification that would include the registered address of the LTC wallet of the user(sender) and the registered address of the LTC wallet of the user(recipient).

5: When transfering coins, the user(sender) would select the amount, select the address (via scanning QR code on Device), enter a passphrase and hit send.

6: The transfer request would enter the LTC blockchain. The passphrase and amount to send would be encoded into a numerical string that would be represented as the amount sent. (this numerical string could be a some sort of rotating key system)

(6a: Additional encoding could be devised through some system of returning payments to the same wallet according to some algorithm.)

7: The server monitors the LTC blockchain, when it finds a payment sent from one registered LTC address to another, it decodes the numerical string to check the validity.

8: The server checks the BTC balance of both accounts, if there is sufficient BTC, it opens the encrypted wallets via the confirmation of identity of the sender/receiver and sends the amount.

(8a: It is at this juncture that many levels of security can be implemented, SMS confirmation required for sending amounts over a certain amount, fraud analysis, emergency freezing of accounts, emergency deletion of wallets, etc....)

9: The server sends an updated BTC balance to both users via LTC and confirms the payment.

10: Users can always receive BTC from any address on the BTC network and the server will update it's registered users accordingly. Users can not send BTC from the Servers wallet without going through the authentication process. The wallets can not be decrypted, and coins sent, by any process other then described as above, which providers several layers of security.

The Reasoning:

The reasoning behind this is that one of the biggest hurdles for getting BTC in the hands of a wider audience is the inherent difficulty of securing one's wallet. Hackers are clever folk and the average individual with a wallet on their computer or cell phone most likely does not have the IT abilities to properly secure either.

Additionally the relatively slow confirmation time for the BTC network also means that even relatively few small attempts to double-spend or otherwise cheat merchants (customer walking away before a confirmation, etc) could prove disastrous for large scale adoption. Indeed, many situations where BTC would be most useful (Vending machines, Fast Food Restaurants) are also the most trying for the currency due to the delay in confirmations.

Of course BitInstant type services go a long way to solve problems like this, but I find it somewhat antithetical to the idea of bitcoin that we have this fabulous new monetary system but need an old school style credit insituation to make it work effectively. Not to mention that if BitInstant is providing short term credit, they (or systems like it) will eventually (if they are successful) end up with a lions share of ownership of coins (if every transaction is processed through them, and they charge interest, then eventually they will accumulate all coins). I've been wondering then how could a service be constructed that provides instant guaranteed payments, without lending credit.

My assumption is that in local markets there will be companies that will be setting up local merchants and users with secure BTC systems, as the average merchant is not going to have the technical skills to do this. Average users with wallets on their cell phones are not going to accept that if they lose/drop their mobile phone their wallet and coins are gone with it. One of the reasons people like using credit cards is their relative security in not needing to be responsible for securing their money.

In this system, the local BTC company would serve as a small "local bank". They would maintain their own servers, (including BTC mining and LTC mining as they are a local market they could provide the first 'confirmations') and they would provide this service at some fee. They could be small or large operations and they could decide themselves how they would like to charge for their services. They most likely would also provide ATM's in their local area and POS terminals for restaurants/shops.

In essence they would be providing protection to their own account holders while remaining compliant with the Bitcoin protocol at large. They could also have a system by which the BTC wallets are impossible to decrypt automatically without all the steps described, preventing even sys admins from being able to steal coins. Being a local 'bank' however, print wallets could be physically kept in a vault allowing for ordinary people who've lost their phones or have been locked out of their accounts, to travel down to their local bank, prove their identity, and the bank could set them up with a new system, restoring their wallets.