Does the Lightning Network Threaten Bitcoin’s Censorship Resistance?

The
Lightning
Network

may well be Bitcoin’s primary solution to the issue of

scalability

, but many skeptics believe there are unresolved issues with this
layer-2 system

for the blockchain. The possibility of too much centralization via
so-called “supernodes” is one of the common criticisms of the
Lightning Network, and attached to that is the fear of these new,
mostly -centralized payment hubs having the capacity to censor
transactions.

Bitcoin Magazine

recently reached out to
BitGo

Engineer and
Statoshi.info

creator
Jameson Lopp

to get his thoughts on the possible privacy issues associated with
the Lightning Network.

Lightning Network May Offer Better Privacy

Although a loss of privacy is sometimes mentioned as a possible,
negative aspect of the Lightning Network, the reality is that it
may offer better privacy than the current base layer of the Bitcoin
blockchain. This is mainly due to the fact that the blockchain is
an open, mostly -transparent ledger that can be viewed by anyone
via a
block
explorer

.

Lopp made this point during an interview with
Bitcoin Magazine

:

“I expect that privacy will actually be better on the
Lightning Network than
on-chain

because transactions are not broadcast to the entire network. It
will be much harder to collect analytics on the Lightning Network
because routing nodes only know the hop before and the hop after
when routing, not the entire route.”

Although not perfect, the Lightning Network does offer the
advantage of keeping information related to specific transactions
away from an open, transparent ledger. Whether the Lightning
Network can offer better privacy than a traditional bank account
(where only the bank and the parties involved in a transaction know
about it) is an unknown at this point.

Will Nodes Be Forced to Comply with AML and KYC
Laws?

One of the main concerns associated with a Lightning Network
that has a few entities running nearly all of the nodes is that
these nodes will be forced to comply with
Anti
Money Laundering

(AML) and
Know Your Customer

(KYC) regulations. To this point, Lopp responded, “I understand the
AML/KYC fear, but routing nodes are non-custodial.”

Lopp went on to explain that BitGo has based its business around
being non-custodial because it means it doesn’t have to deal with
all of the regulatory issues associated with holding user
funds.

The BitGo engineer also noted that the Lightning Network could
still operate in an environment where the laws are changed to fit
that regulation-avoiding model. Lopp believes that, much like the
Internet, users could simply go around nodes with onerous
requirements for routing payments. He added, “In that [scenario],
we’ll still see plenty of non-compliant nodes.”

A Never-Ending Battle of Privacy vs.
Surveillance

It’s possible that the battle between privacy and surveillance
will never end. Having said that, those attempting to break privacy
on the Internet are usually responding to new technologies created
by privacy-minded individuals and organizations.

At this point, it appears that an attack on the level of privacy
offered by the Lightning Network would be similar to an attack on
the
Tor

network. Lopp told
Bitcoin Magazine

, “I imagine that they would need to be a well-funded attacker in
order to be able to watch a significant portion of traffic.”

Blockstream

‘s
Rusty Russell

and
Lightning

‘s
Olaoluwa Osuntokun

have been working

on bringing
onion routing

to the Lightning Network, and it’s clear that privacy is given the
utmost respect by the developers working on this project.

“I foresee a Tor-style arms race in the future on two fronts,”
Russell told
Bitcoin Magazine.

“One will be the battle against analytics (such as timing attacks)
and bugs. The other will be against centralization, which as
Bitcoin is learning, is a hard problem that, which is mainly met by
(1) making it easy to decentralize, and (2) making sure people are
aware of the danger.”

There are always tradeoffs between privacy and usability.
Zcash

appears to be the most privacy-conscious blockchain today, but
there are
a few issues

with the system when it comes to efficiency.
Open
Transactions

could also be used to implement truly anonymous digital cash, but
the
federated server model

in that system is not as secure as a blockchain (or even the
Lightning Network) when it comes to control over one’s funds.

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