The main theme of Fairlayer is not to force you onto some specific type of balance, but provide a convenient wallet to hop between each type. Onchain balance is great for millions of dollars, terrible for coffee payments. Unsigned balance is terrible for millions of dollars, great for paying in subway.
Insured and uninsured are perfectly positioned in between, both being more secure than unsigned and more convenient than onchain.
Let's try to formalize these 4 types of balances we're talking about.
| Properties | Onchain | Insured | Uninsured | Unsigned |
|---|---|---|---|---|
| Security | Highest | Very High | Medium | Lowest |
| Convenience | Lowest | Medium | Very High | Highest |
| Invented | Bitcoin (2009) | Lightning (2015) | Fairlayer (2017) | Used for centuries |
| Can be sent instantly (through a bank) | No | Yes | Yes | Yes |
| You have a digital proof of ownership | Yes (N/A) | Yes | Yes | No |
| You can be selectively censored by a bank | N/A | No | No | Yes |
| Validator Majority can attack you | No | Yes | Yes | Yes (N/A) |
| You are guaranteed to redeem it | Yes | Yes | No (insolvency/compromise) | No |
| Can be received/spent offline | N/A | No | No | Yes |
Security: Highest Possible
Onchain balance cannot be taken from you under no plausible attack, period. Only a hardfork or smart update decision could seize your onchain balance. You can go offline for years and it still will be assigned to your pubkey. Can be assigned a multisig vault (n/m signatures required)
Usability: Lowest Possible
Very expensive and slow to send: always requires an onchain transaction and induces high fees. Use it only for money you don't plan to spend for years.
Security: Very High
There are few rare corner-cases when you might lose money: when you are offline for long time, the watchtowers fail to broadcast fraud proof and/or validator majority works against you. Other than that security of insured balance is equivalent to security of onchain balance.
Usability: Medium
You can only receive into insured balance if there's charged capacity towards you from the bank, i.e. if you just "spent" on something. Otherwise money will arrive to uninsured balance and will be rebalanced at some point in the future.
Can be sent/received instantly through the bank. Requires a signature generated on your device (must be online to send)
Security: Medium
This is an extension we added to Lightning Network model - simply the ability for delta to go beyond the capacity (insurance). Just like the insured one this balance is signed and can be enforced onchain, however if the counterparty is insolvent/compromised and there are simply no assets to return you, you might lose your money. Uninsured balance is a lot more secure than just an unsigned balance thanks to enforceability - there's no way to censor just you, its security is binary - either the bank stops serving all channels and exit scams (losing on all offchain fees for years to come) or the money will be returned to you no matter what. Still, it's recommended to keep most of the money in onchain or insured balance.
Usability: High
You can receive any amount of money from the bank by setting as high credit limit as possible. But it's strongly recommended to keep a sane credit limit $1-100k and have proper risk management.
Can be sent/received instantly through the bank. Requires a signature generated on your device (must be online to send)
Security: Lowest Possible
That's how all banks, financial banks and payment providers worked until now. Just a number in some centralized database that can be wiped down any second with no digital proof provided to the customer, no obligations, no control. The funds are entirely in custody of the central authority.
Usability: Highest Possible
On the positive side, it's a lot easier to use with things like offline payments, subscriptions, physical credit cards - unlike first 3 these payments do not require a signature provided by you - money doesn't have to be "pushed" and can be "pulled" from your account.
By a money transfer we mean any method to increase total asset value of the receiver by reducing our own asset value. In total there are 4 scenarios of onchain payments and 4 offchain, each best suitable for different size of payments
A user that owns anything onchain can always choose to perform a direct settlement broadcasting a public transaction. This helps to avoid using a bank, has highest security and no capacity limits. However, induces higher fee.
In fact there are 4 combinations of such settlement. Onchain outputs have null in place of bankId. Also known as splicing in LN.
Onchain => Onchain - traditional way to transfer money in all other blockchains. This way you transfer from onchain balance directly to someone's onchain balance. But since onchain balances are harder to spend, it's usually recommended to transfer to a channel.
Onchain => Insured
Insured => Onchain
Insured => Insured - most preferred way to use onchain settlements is to withdraw money from your channel and deposit to recepient's insured balance.
Offchain sends may be unconditional ("addrisk" without hashlock, cheaper to service) or with hashlocks. They also can be one-off or streamed (sent in smaller chunks, like subscription. Each second, daily, weekly etc.)
Offchain hashlock
Offchain hashlock streamed
Offchain risk
Offchain risk streamed