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.
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.