Bitcoin correct straight off is not genuinely anonymous. Monitoring of the unencrypted peer-to-peer network in addition to analysis of the populace blockchain, combined amongst Know Your Customer (KYC) policies in addition to Anti-Money Laundering (AML) regulation, tin reveal a lot almost who is using Bitcoin in addition to for what.
This is non slap-up from a privacy perspective. For example, Bitcoin users powerfulness non necessarily desire the the world to know where they pass their money, what they earn or how much they own; similarly, businesses may non desire to leak transaction details to competitors.
And the fact that the transaction history of each bitcoin is traceable puts the fungibility of all bitcoins at risk. “Tainted” bitcoins may live valued less than other bitcoins, maybe fifty-fifty calling into interrogation bitcoin's value proffer every bit money.
But this tin live improved. Perhaps ane of the most promising solutions is designed to live an integral constituent of ane of Bitcoin’s highly anticipated scaling layers: the lightningnetwork. Utilizing the “Sphinx” protocol, lightning payments volition live routed over a Tor-like anonymity network to offering privacy in addition to protect fungibility.
Payment Channels in addition to the Lightning Network: Influenza A virus subtype H5N1 Brief Recap
The lightning network essentially consists of bi-directional payment channels, creating a peer-to-peer network.
Bi-directional payment channels growth privacy fifty-fifty without the lightning network. Two users — let’s state Alice in addition to Bob — tin opened upwards a bi-directional payment channel in addition to transact over this channel through a person medium. Only in ane trial they are finished transacting volition they broadcast the terminal state of the channel to the blockchain. This populace transaction reveals how much money Alice sent to Bob — or the other manner around. But at that spot is no manner to enjoin whether this was through 10 transactions, a hundred pocket-size transactions, or maybe fifty-fifty a thou transactions dorsum in addition to forth. This ambiguity is a boon for privacy.
Unfortunately, a disadvantage is introduced when these bi-directional payment channels are all linked to practise a peer-to-peer network. If Alice pays a 3rd user — Carol — through Bob, Bob volition know that Alice paid Carol, in addition to how much. While Alice in addition to Carol nonetheless convey relative privacy inwards relation to the residue of the world, they practise non convey privacy inwards relation to Bob. And if at that spot are 2 or to a greater extent than intermediaries — not exclusively Bob but also Dan — both Bob in addition to Dan acquire almost the transaction betwixt Alice in addition to Carol.
Not ideal.
Sphinx
The electrical current lightning network specification includes a solution to mask routing information from all intermediaries, based on Sphinx.
Designed past times academic researchers, George Danezis in addition to Ian Goldberg, Sphinx is a protocol to relay anonymized messages over a peer-to-peer network. The solution was first proposed inwards May 2009, in addition to had nix to practise amongst the lightning network or fifty-fifty Bitcoin. It was Lightning Labs’ Olaoluwa Osuntokun who realized Sphinx could live utilized and, inwards collaboration amongst Blockstream’s Christian Decker, modified the protocol to improve agree the lightning network.
Sphinx shares similarities amongst the well-known anonymizing communication tool, Tor (the Onion Router). As amongst Tor, whatever information packet sent amongst Sphinx — including the receiving IP address – is encrypted. This encrypted packet is in addition to so itself encrypted a twain times over until it consists of several “layers” of encryption (hence the “onion” metaphor for Tor).
Using clever cryptographic tricks, all these layers of encryption are applied so that each intermediary along a route toward the terminal destination of the packet tin let on exclusively ane layer. This layer reveals to each intermediary where the packet must live forwarded to, but nix else. (Compared to Tor, Sphinx uses improved cryptographic algorithms in addition to creates a constant-size information packet to improve obfuscate a node’s grade inwards the route.)
On lightning, the payer determines a path over the peer-to-peer network in addition to wraps a payment packet inwards layers of encryption. And, apart from merely relay information, each intermediary also unpacks to a greater extent than or less additional data. This includes amounts, fees in addition to more, along amongst allowing all intermediaries to fix a stride inwards the payment chain. (In a futurity version of the lightning network, this may live extended amongst a protocol called “Hornet” to farther streamline the whole procedure — but this is non strictly needed for the lightning network to function.)
Importantly, all intermediaries exclusively acquire from which channel they have bitcoins, in addition to to which channel they must forwards the payment. The intermediaries convey no stance whether they are the commencement stride inwards the chain, the lastly step, a stride somewhere inwards the middle, or perhaps fifty-fifty the exclusively step. Whoever originally sent the transaction, in addition to the ane who ultimately receives it, stay known to exclusively the sender in addition to the receiver.
Whenever channels close, the advantages offered past times bi-directional payments channels are clear — on steroids. While everyone gets to run into how many bitcoins Alice sent to Bob over the duration of the channel, again, it remains unknown whether these were 10 transactions, a hundred pocket-size transactions, or maybe fifty-fifty a thou transactions dorsum in addition to forth. Moreover, Alice may non fifty-fifty convey sent much of the money to Bob at all: perhaps most payments from Alice to Bob were genuinely routed to Carol, or to someone else, anywhere on the network.
For technical details on lightning routing, see part fourof the lightning network specification every bit explained past times Blockstream’s Rusty Russell, orOlaoluwa Osuntokun’s presentationat Scaling Bitcoin Milan.
The post service How the Lightning Network Layers Privacy on Top of Bitcoin appeared commencement on Bitcoin Magazine.
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