While the Lightning Network is generally often known as a method to make Bitcoin funds instantaneous and virtually free, one other often-touted facet of the layer-two protocol has been its capacity to allow a kind of decentralized change as a facet impact of its authentic objectives. However, the viability of this performance has come underneath fireplace not too long ago as builders have uncovered a possible exploit of this method.
Lightning Network would be the final decentralized change. Users which are operating LN on each BTC and LTC can promote an change value and act as a maker incomes a selection. Other customers can act as a taker and atomically swap LTC/BTC with the maker node by way of lightning. ⚡🚀🌕
— Charlie Lee [LTC⚡] (@SatoshiLite) July 11, 2018
How the Lightning Network Functions as a Decentralized Exchange
Although the Lightning Network is normally related to Bitcoin, the payments-focused layer will be constructed on prime of another blockchain that has the right underlying options. For instance, Lightning transactions have been efficiently examined on the Litecoin and Vertcoin networks.
When Lightning Network performance is obtainable on a couple of blockchain, it turns into potential to immediately swap the native tokens of these blockchains in a decentralized, low-trust method. This works by routing funds via Lightning Network customers who’re working on a number of blockchains. If Alice desires to ship some litecoin to Bob however she solely has bitcoin obtainable, she will route via a 3rd get together who’s holding each bitcoin and litecoin on the Lightning Network.
The Issue with This Setup
While this decentralized change sounds superb in concept, a number of builders have poked holes in the logic behind the characteristic.
As identified in the most recent issue of Bitcoin Optech Newsletter, Lightning Network developer Corné Plooy created a thread on the Lightning-Dev mailing listing again in May of final 12 months the place he defined how cross-chain Lightning Network funds successfully create a nearly-free choices contract for customers. A pseudonymous developer not too long ago brought the topic up again on the identical mailing listing.
The fundamental subject at hand is Lightning Network individuals are in a position to delay transactions. Through this flaw, a person might pause an change from bitcoin to litecoin (for instance) and see how the bitcoin to litecoin change price adjustments over the following 24 hours.
If the change price strikes in the person’s favor, they’ll full the transaction. If the change price strikes towards them, then they’ll trigger the transaction to fail. With this technique, the person can earn money by merely canceling unprofitable trades and accepting worthwhile trades. They mainly get to commerce primarily based on data of the place the worth will transfer in the long run.
A Solution That’s Good Enough
While the pseudonymous developer behind the latest mailing listing thread on this subject believes the concept of a multi-asset Lightning Network ought to be deserted, Plooy has provided a possible resolution that includes the usage of a 3rd get together between the 2 customers who wish to make a commerce. It could appear paradoxical to resolve a Bitcoin drawback with the usage of a trusted third get together, however the quantity of belief positioned in the third get together is fairly low. More importantly, Plooy’s resolution continues to be an enchancment over conventional, centralized crypto asset exchanges.
“The system described here is not perfect, but when it comes to developing decentralized and trust-free alternatives to exchange services, it is an improvement,” writes Plooy in his explanatory paper on his resolution (PDF), “Compared to a regular exchange service, which has control over customers’ funds, the routing service cannot steal from its customers, it cannot lose customers’ funds in case of a hack, and unless the service provider [decides] to add restrictions on who [or] when to serve, it doesn’t have to know any [identifying] information about its customers, or even what asset is being traded between them, at what exchange rate.”
In brief, the one manner the trusted third get together can cheat is to conduct the identical delay assault that Plooy’s resolution is meant to resolve in the primary place. Trusted third events can compete with one another on charges, trustworthiness (not doing the delay assault on their customers), and different options. The must protect one’s popularity as an change supplier on the Lightning Network ought to restrict the proliferation of this assault.
For now, it stays unclear how a Lightning-based decentralized change will perform in the true world, however Plooy’s resolution seems to be a “good enough” strategy that may nonetheless provide large worth to customers. Additionally, it’s potential that another person will provide you with a greater resolution that might make the Lightning Network’s performance as a decentralized change require even much less belief in a 3rd get together.