2- LN will not make for decentralized exchanges nor will it prevent exchanges from getting hacked. If anything it will probably make exchanges more vulnerable to hacks.
actually LN would make things safer.
imagine coinbase had a public/private keypair and the customer did.. coinbase never gets hold of the customers privkey.
they form a multisig and independently sign the transaction..
coinbase cant move the funds alone with out the customer signing off on it
customer cant move the funds alone without coinbase signing off on it.
thus a hacker cant either.
imagine it. when signing up to coinbase you supply them with a PUBLIC key you created.
to log in. coinbase show a random message and ask you to sign it independently. and you send them the sig.
coinbase validate its really you by knowing its a signed message validated by the public key.
the PUBLIC keys of you and coinbase are used to make a multisig. and this becomes your deposit address..
you put funds in and then instead of looking for a balance on coinbases database you are looking at the funds in the LN tx instead
where the LN tx is an actual broadcastable tx of actual funds. no mysql random entries, but an actual bitcoin amount yet to be broadcast.
neither parties see each others privkeys all they send and receive to each other is signed tx's
This scenario will force coinbase to keep all of the customer money they are responsible for in their hot wallet, and nothing in cold storage.
Say for example, you want to sell on conbase at the market price. You will have an open LN channel with coinbase, and you enter a LN state so that coinbase has the bitcoin you are selling, your oder gets filled, then your account is credited the USD amount of the sale (minus their trading fee). The person you sold to will have their USD deduced from their account, and coinbase will enter a LN state so that the other customer has the bitcoin in their LN channel. In this scenario, anyone holding any amount of USD at coinbase can potentially have their USD stolen.
Now say that bitcoin is trading at $1,000 on coinbase, but you do not want to sell for under $1,050, so you open a limit sale order so that you will sell your bitcoin at $1,050 as soon as there is a buyer, but you need to enter a LN state so that coinbase has the bitcoin you want to sell so they can credit the buyer with your bitcoin as soon as the order fills. So now coinbase effectively has the value of all of the sell orders in their order book in their hot wallet. A hacker would have the ability to steal all of the BTC in the orderbook.
Here is where it can get really bad. A hacker could trick coinbase into thinking that more USD is in your account then what really is, then the hacker could use that non-existent USD to bid up the price of bitcoin on their exchange. Now the hacker would be able to steal the entire amount of bitcoin in the order book, but it would also look like that bitcoin is trading at a premium on coinbase. With the price of bitcoin appearing to be very high on coinbase, other traders will be enticed to place additional sell orders on coinbase, allowing the hacker to gain access to even more bitcoin.
