Bitcoin Forum

Good day, everyone!

Firstly, I hope this is the correct sub-forum to post this question.

I'm not new to Bitcoin, but I'm a complete noob when it comes to Lightning network. I was playing around with various BTC/Lightning wallets on my phone and pondering a question. Say I have this scenario:

I buy BTC on a KYC exchange and transfer it (on-chain) to a hot wallet on my desktop. From there I transfer it (again on-chain) to Muun wallet on my phone. From Muun I pass it through Lightning network to Speed wallet, also on my phone and finally I send it (on-chain) to my final cold storage address. Neither Muun or Speed wallet have any KYC data (except knowing my phone number, I guess?). Is that one Lightning transfer enough to cut the trace or it is still somehow possible to associate the final address back to the original exchange?

Thanks  ;D

It breaks the on-chain connection, and is probably going to be quite difficult to trace. But I'm not sure how likely it is to find the trace.

I have a different question for you:
Who are you trying to hide from? Depending on the answer, this may or may not be a good idea. If you want to sell your Bitcoin when it's worth a lot more in the far future, a KYC exchange (or your bank) may ask questions that are a lot easier to answer if your Bitcoin came directly from a KYC exchange.

I don't know the particulars of those wallets, but they probably collect at least some analytics. Some wallet providers collect a lot of data, but they are more often altcoin wallets or multichain wallets. Be careful and analyze before using.

It would be much better to exchange the BTC to Monero or Zcash, and exchange it back after a while. You can use decentralized exchanges (https://kycnot.me/) or semi centralized providers like ChangeNow (https://www.trustpilot.com/review/changenow.io). Generally a lot of the below applies directly to Bitcoin and using Lightning Network, you just have to translate the things. Are you using a custodial wallet, are you using your own node or SPV, and so on.

There are some quick notes what you need to consider and how you can be tracked, loosely ordered on the easiness of tracking you:

• Address. Example scenario: You exchange BTC from address A to Monero on address B, and then you exchange Monero from the same address B to Bitcoin to address C. In this case, if you used the same service provider it is easy to track you or even if you used two different services a comparison of the two data pools can lead to deanonymization.
• Fingerprint. Using the same browser fingerprint and/or IP address on the same or different services. Again, the risk here is data pooling between services whether by the service providers themselves or by third party analytics.
• Amounts. Exchanging the same amounts can provide a limited or non existent anonymity pool depending on the specific of your situation. A simple example. If you exchange 0.1 BTC to Monero today which is about 32 XMR now, and then you exchange 32 XMR tomorrow back to Bitcoin you lose any anonymity there as it is clear that it the same entity.
• Timing. Timing is extremely important and in the short term destroys any anonymity that you may get. However, it can be considered also for longer periods of time when combined with other data. A short term example is given. You exchange 0.1 BTC to Monero which is about 32.12 XMR. You split it into two addresses of 16.06 each to avoid amount correlation attacks, and then you proceed instantly to make two exchanges of 16.06 XMR minus the fees back to Bitcoin. The likelihood that this is the same entity is extremely high.
• There are probably a few others, but these are the major ones that to mind first. Maybe I should consider writing a thread about it..

Depending on the anonymity that you require or need, something like this should be your flow to maximize your anonymity set.

• Two browsers with different fingerprints and different proxies or VPN IPs. Make sure that you use IPs that you normally do not use from your VPN or proxy provider.
• Two different services, one in each browser. Whether from the KYCNOT exchanges or semi centralized providers like ChangeNow.
• Swap to Monero using 1 service. Split to new addresses in random amounts, avoid address reuse.
• Wait for time to pass, the longer you can wait the better it is. This is entirely up to you but longer is better, we are talking about days or weeks if possible. Keep in mind that you are exposed to exchange rate fluctuations here, but if you value the anonymity gains or require it then that is the cost to pay for this.
• Swap back to Bitcoin using the other service, optimally each swap should go to a new Bitcoin address and you should do this over the course of some time and not instantly swap all splits in a sequence.

This is more like a base, very strong anonymity setup. You can make each point deeper, mix and match to your preference. I can't tell you how many splits are required or how much time you need to wait, generally more is always better. Just be mindful of costs, and basic errors. Research each point, understand what you are doing. If you have superficial knowledge of this topic, you will do some things and have a false sense of accomplishment and anonymity. It may come back to bite you in the long future, depending on what you are doing and why.


If he plans to sell it again on a KYC exchange, this will cause a lot of trouble yes. If he never plans to sell on a KYC exchange, then he is fine with this. Generally, there is no issue if you get your coins from semi-centralized providers but obviously for large amounts questions will be asked. Additionally, laws keep changing for the worse and depending on where the user lives he may need a lot more proof in the future than he does now.

I indeed plan to hold most of my BTC into the far future, when adoption and infrastructure to spend it will be so common, we won't have to use exchanges anymore, nor have the need to turn it into fiat. At that point the absurdity of paying capital gains on BTC we spend will hopefully also be gone.

But my question was mostly just technical - to better understand these things. So far I haven't parted with a single SAT yet. I don't trade or anything like that.

@Satofan44, thanks for the extensive reply. Much appreciated!!

Yes the trail breaks when you transfer Munn to Speed via LN because it's happening offline and only who control the entry as well as exit nodes can link that if they want to and it is almost impossible via chain analysis to link back the transfer with KYCed address unless you reuse the address again to link with any KYCed funds again.

It is possible to track even via LN,

No, this is not true. The link is not broken and there are many ways you can be tracked. Please don't give incorrect information here.

I hope that you have understood that my answer applies pretty much directly to LN as well. Just think about it, starting with the address reuse example. In addition, there are probably some LN specific concerns. Reading a paper such as this one could be interesting to you: https://arxiv.org/abs/2003.12470.

If you have any questions about any specific points, but how it relates to LN feel free to ask. Generally you can think about it this way: Almost everything is possible, it just depends on the following:

• Who is looking? From random users to state agencies.
• How hard are they looking for it? From basic analysis of addresses to correlational timing and more complex attacks.
• And most importantly, how many resources are they willing to spend tracking you?

Assuming a state actor with near unlimited resources (time, money & legal power), my guess is everything can be analyzed. Of course they would need to obtain data from every wallet involved in the transfers, while the base layer is completely open and easy to inspect.

I'm thinking more in the sphere of what's plausible - how much resources would a state employ, to go after a random citizen who might have spend 50 bucks of BTC on a dinner, without declaring capital gains on it? For example. Not something that is nearly 100% anonymous in all cases (and requires a lot of technical knowledge), just less traceable and less worth going after. On-chain is too easy to follow, while Lightning adds just enough obfuscation to become a hassle - as far as I understand it.

Then there's the consideration that KYC is a huge security issue for end users (hacking of exchanges, data leaks, etc). A person doesn't need nefarious reasons for wanting to improve their anonymity. I didn't understand these things when I first started to save in Bitcoin. There's a lot to learn.

Thanks again everyone for your inputs!  :)

They won't go after one particular random citizen, they'll just analyze everything they can and see what comes out.

Obfuscating your current holdings won't change the potential risk from a data leak.

No it's certainly not enough.
Lightning Network is centralized network and analytic companies like Chainalysis are already tracking everything on Lightning Network.
Another problem is that Lightning is not mean for larger amount of coins, and you also need to get back coins on-chain at some point.

I'm interested to know what is your definition of the Lightning Network being "centralized".
Because it's not managed by a single authoritarian or a central server.

If it's a reference to those old topics about "banking hubs" lightning nodes, those are just for FUD purposes.

I have following questions about your statement.
1. How exactly Muun wallet able to send Bitcoin on LN in offline manner? Unless i missed it, their website[1] and blog[2] doesn't mention such feature.
2. What do you mean by entry and exit node? LN whitepaper[3] have exactly 0 mention of "entry node" and "exit node".


I generally agree. But on few cases, government provide incentive to both government worker and eligible citizen to report financial-related crime.

[1] https://muun.com/ (https://muun.com/)
[2] https://blog.muun.com/ (https://blog.muun.com/)
[3] https://lightning.network/lightning-network-paper.pdf (https://lightning.network/lightning-network-paper.pdf)

1. Perhaps, I should have used the term Off-chain not offline that created the confusion in the first place.
2. I used the term we generally use for TOR, LN uses the onion routing too so I used the same analogy because that's how I remember these things so maybe those are wrong and I should have replied extensively instead of simple terms.

My knowledge about bitcoin and it's technical knowledge is limited to bitcointalk only not go to an extent of making my research paper, so every time if I have a query I simply refer The Lightning Network FAQ (https://bitcointalk.org/index.php?topic=5158920.0) and in this case I used



So when funds transferred from Munn to another then Sender Node that facilitate the open channel initiate the transfer and the funds hops between intermediary nodes before reaching the receiver and every node only has the data of where funds are coming from and where the next destination is going to be so if someone wants to trace this then they should have access to all the nodes where funds are being routed.

And that's what I said almost impossible.

Well once you have registered to a KYC exchange then they've got your data, which is a complete dox (full name, address phone etc) plus your transaction history and current crypto holdings. This is always a problem whether you have mixed your coins or not, since you become a target of "potential BTC holder". But if you have not been paying attention to your utxos, then you'll have a bigger problem. But when it comes to exchanges, you cannot use mixers anyway since they get detected by chainalysis potentially, which could get your funds frozen. Nonetheless, the idea of obfuscating your transaction history before sending it to someone that will store the data in order to separate your main stack from the funds you are moving is a valid reason for doing so. In general, before paying to someone, you don't want to disclose your transaction history, this is why mixers should be fully legal, it's just a matter of safety. You don't want to be the guy that wants to buy something, sends the BTC, and then the receiver can easily go through tx history on the blockchain and find out you've got like 10 BTC and suddenly you become a target. To avoid this, you must obfuscate the funds you want to use first, and then send it to the receiver, but exchanges that use chainalysis are incentivizing people to not do so, putting them in trouble when they get hacked.

at the op.

open four wallets

it could be four trezors

it could be a pair of cores and a pair of electrum

two trezors one core on electrum bla bla bla.

make one your every day use wallet.

make two hodl no effort to hide wallets hodl ten or more years.

make one the convoluted twisted find me if you can wallet. hodl ten or more years

never spend from the three hodl wallets

so pretend it is ten years from now.

you still have constant use wallet

and 2 coins in wallet a hodl not hidden
and 2 coins in wallet b hodl not hidden
and 6 coins in wallet c twisty mofo

you will see how the laws are and have to option to spend legit and pay tax if you want

or use the twisty one.

1. Yeah. Off-chain and offline have different meaning.
2. That makes sense when you mention use Tor's onion routing as analogy. But since i don't how exactly Muun and Speed wallet manage LN channel, there's possibility of reduced privacy either due to,

• Muun send Bitcoin directly to Speed without any intermediate channel.
• Muun may setup it's LN in a way that know the destination. For reference, this is limitation exist on Phoenix wallet.

The strategy to not do any KYC and wait for better laws in the future is valid, but how do we know it will get better in the future? While your BTC getting increasingly more valuable will open you tax possibilities overseas, we can't really know what they will come up with. At least EU wise, they are becoming increasingly tyrannical against it, so nice places such as Portugal and Malta may be out of the map in the future, but you still have a window of opportunity now. And in the future other countries may or not become more or less BTC friendly, you can never know. The only hope is that the higher your net worth the more resources you have to establish your tax residence, but that is an assumption, we cannot really know what the tax game will look like long term.

Majority of users are using custodial lightning network wallets, and it's all being hosted on big hosting servers like amazon, g00gle, digital ocean, etc.
I have seen reports that 98% of Lightning Network users likely don't run their own node or manage their own channels.
This is not ''fud'', it's reality and common knowledge.

I like LN for low fees on small transactions, which means I'm okay with a non-custodial centralized wallet. It's a trade-off, and one that I've accepted.

you are correct.

my method makes 60% hidden

and 40% open

and can be shifted and adjusted if needed.

you are covered in both cases no kyc and kyc.

personally i just pay the taxes and do not worry.

to go all kyc is my choice.

but anyone trying to be 100% no kyc is foolish in my opinion.

But that doesn't generalize Lightning Network as centralized since the uncertain reports are all about wallets and users, not nodes.
What I'm saying is, the original reply should be specific on "Centralized Lightning Wallets" and not the "Lightning Network" in whole.

Sure ChainAnalysis have ways to track users in LN and IIRC, they've already claimed a bounty related to it by setting up lots of LN Nodes.
But it isn't because LN is centralized.

That's kinda funny: so to spy on it, they need to support it. I always assume most of the Tor nodes are ran the same way.