Will The Lightning Network Damage Bitcoin Privacy?

One of the most important developments for Bitcoin and the cryptocurrency space from the last years is Lightning Network (LN). This off-chain scaling solution may bring speed to Bitcoin transactions and reduce fees. But, will the Lightning Network damage or help Bitcoin privacy?

Can Lighting Network Damage Bitcoin Privacy?

Bitcoin has allowed several individuals to freely send and receive payments from all over the world. It has reached an incredible audience that believes that its transactions are private and hidden from governments. But due to the fact that Bitcoin publishes transactions in a globally distributed ledger, privacy seems not to be Bitcoin strongest point.

At the same time that LN brings speed, reliability and low fees to the Bitcoin network, it has some problems to solve. With the LN, privacy can be degraded. As Lightning payments occur off-chain, the information is not included in the blockchain that all nodes store. Instead, the payments are broadcasted across the nodes within the network. In order to ensure that routing is available, the Lightning channels must trust the others in order to help relay transactions. 

In this way, third party participants could sell that information to governments or enterprises. This is a risk that is inherent to the Lightning Network.

Ian Miers, co-founder of ZCash, commented:

“Bitcoin is Twitter for your bank account. Everything is public to everyone. Lightning likely won’t improve privacy, it may make it much worse from an average consumer’s perspective.”

Lightning Network developers know that this is an important issue that must be addressed and this is what they are doing. As the Lightning Network is not yet implemented officially, it is being tested and improved. Developers are searching different solutions in order to reduce the privacy problem that the LN has.

At the moment, the most important feature that the LN includes is the so called “onion routing.” This is part of the Basics of Lightning Technology (BOLT). With this feature, payments are passed through multiple channels and just the minimum information about that payment is exposed.

As the technology is being developed, there are some ways that onion routing can be manipulated, leading to loss of privacy.

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