Bitcoin has had a scalability issue for years. This cryptocurrency is trying to be the global money of the future, but it doesn’t currently have the technological prowess needed to achieve this. Bitcoin’s blockchain will need to have a much higher throughput than the current 7 transactions/second to allow everyone to use Bitcoin as their daily payments.
Diverse projects have tried to develop off-chain, third party solutions. Lightning Network is a second-layer solution with a high throughput of up to millions of transactions each second.
Lightning Network consists of creating payment channels that allow wallets to send funds quickly to one another, and not rely on the Bitcoin Blockchain’s speed.
It’s a fairly simple process: Two Lightning Network nodes create a Multisig wallet. This is a Bitcoin Address that asks each node for their private key to approve transactions before they are published on the blockchain.
The nodes have now effectively created a channel of payment between them. They can update their balances instantly and off-chain for an infinite period. After they have completed their transaction, they can shut down the payment channel by broadcasting to the Bitcoin main blockchain the final balance.
Lightning Network could provide major scalability gains. Questions have been raised about malicious nodes and users. When a Lightning Network node that is transacting goes offline, a window opens for malicious activity.
Unauthorized nodes that have a channel of payment open to this offline node may decide to broadcast a balance (invalid) to the Bitcoin Blockchain and compromise its funds.
Any party in a Lightning Network Channel can at any moment broadcast the balance of a wallet. The malicious node can broadcast an older balance, which does not contain the outgoing transactions made to the node that is now offline. This will reduce the balance of the node that has gone offline. Double spending can be interpreted as a reversed transaction.
Lightning Network is designed so that it requires a specific number of Bitcoin blocks to be added before an LN transaction can be added (and funds transferred into both wallets).
It is a security measure that is designed to stop one-sided publications of state information and crypto theft. This false publication of state can be stopped by the offline node coming back online. It will catch the malicious behavior, and then broadcast the correct state on the Bitcoin blockchain.
This is not always possible. If a node is offline for any reason (intentional or hardware-related), it can stay that way for days, if not weeks. That is enough time for a malicious node (without even the offline node knowing) to move. The Lightning Network has addressed this issue by adding Watchtowers.
Watchtowers will always be online nodes which monitor the Lightning Network to detect any false states. Watchtowers are nodes that allow individual wallets to connect directly to the Lightning Network and perform transactions.
Watchtower Node: The node monitors the Lightning Network for any breaches. If it finds one, then the node launches a “penalty” transaction to return funds back to the node offline.
This process begins with the creation of Blobs, which consist of public keys and signatures. These are used to penalize the party that broadcasts a bad state of transaction by breaking the channel.
These blobs will be created in the Lightning Network wallet, where transactions off-chain take place. This wallet will search its database with each new payment to see if there are any previous transactions that a channel member might have been tempted into publishing. These payments are each given their own punishment blob, with the transaction ID being used to decrypt it.
The network watchtower receives these encrypted blocks along with half the transaction ID. Watchtower stores these pairs and monitors new blocks continuously in mempool to look for possible halfTXID matches. When a matching transaction and channel violation is detected, a penalty transaction with the specified amount is created and funds returned to the node.
The watchtowers’ system automates the whole process, ensuring that funds are secured immediately in the event of any potential fraud. It also maintains the confidentiality of wallets.
The Watchtower is still a very new technology and there are many questions that need answering before it can be used commercially. A software bug, for example, can cause a LN member to broadcast an old state.
It would be unfair to punish him in such cases. That’s why Eltoo has been proposed. Eltoo would give problematic nodes enough time to rectify their mistake and retract it.
The watchtowers will not be doing this service out of the goodness of their heart. The cost of hardware, Internet, and the knowledge needed to run a network node will be a significant investment for each watchtower operator.
Subscription fees, and Penalty Transaction Fees are proposed to be the preferred forms of compensation.
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It is considered the best way to compensate for nodes. Subscription fees will allow the operator to manage the cost of operating a node, and signal to users that they are getting a good service (it is human nature to associate paid services with high quality). Such fees can cause friction, however. They could slow down LNs and give advantage to those users willing to pay more. The issue of penalty transaction fees is also tricky, as it creates an incentive for watchtowers to make the channel they are watching fail.
Storage space is the biggest expense a node owner will have to pay to operate a watchtower. Lightning Network will implement a watchtower that is privacy-oriented to prevent potential financial surveillance issues.
Learn more by reading the article about how data storage needs quadruple with improved privacy.
The high cost to run them, and the fact they’re not a necessity for the Lightning Network because of the low number of malicious users on it (and the overhead costs of operating them) have led analysts to predict that the watchtowers will become hubs of activity.
LN Watchtowers also are useless for people using the Lightning Network only to send transactions. This is because the recipient of the channel has no interest in publishing previous states on the blockchain.
This means that the Lightning Network will not be as interested in watchtowers, as they won’t have as many nodes as those who are responsible for maintaining the network.
Lightning Network is a system which will be built on the Bitcoin Blockchain and it has been deemed ideal for micro-transactions.
Creating channels with a one-time usage for small transactions can cause problems. These channels are used for everyday expenses like buying coffee. You have to pay an amount each time you create a new channel. This fee could be more than the actual transaction.
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This means the network will be best for those who plan to do business with each other multiple times.
The Bitcoin blockchain is likely to be used for larger transfers, which will need a level of security decentralized that LN and its watchtowers cannot provide.
It’s interesting to note that LN channels are limited by the Bitcoin amount that the user had in their wallet at the time the channel was set up. This is the total amount that the channel can store.
It can be difficult to make large transfers as LN users will have to both lock up significant amounts of money when they open a channel, and also trust the Watchtower with significant Bitcoin.
Lightning Network has a long way to go before it is ready for wide-scale use. Although some “power users” can create channels on the Lightning Network and conduct transactions, the abstract technicalities of the network may be too complex for average Bitcoin holders to grasp.
The number of features is constantly increasing. One recent addition was the watchtowers, which have brought a significant improvement to LN viewers who cannot be online 24 hours a day and can’t watch their channel constantly.
LN developers still have much work to do to make Bitcoin payments instantaneous, safe, and anonymous.