Trace transactions with Lightning Network

[echbit18]

Hi,

How to see transactions that occured in the off-chain part ?

I understand LN will register finally the balances on the blockchain, but what about all the small transactions during the off-chain process ?

Will there be a blockchain.info like tool to explore all transactions ?

Blockchain should be transparent and be able to register all transactions. If LN allows off-chain small transactions for performance purpose, fine, but how to ensure transparency ?

I might not understand well the final process of registration of the balance sheet on the blockchchain, will it show all transactions between Alice and Bob ?

So many questions  Thanks all.

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[Wind_FURY]

Hi,

How to see transactions that occured in the off-chain part ?

I understand LN will register finally the balances on the blockchain, but what about all the small transactions during the off-chain process ?

Will there be a blockchain.info like tool to explore all transactions ?

No because the transactions in Lightning are not broadcast publicly. They are encrypted and sent through the network from the sender to the receiver.

Blockchain should be transparent and be able to register all transactions. If LN allows off-chain small transactions for performance purpose, fine, but how to ensure transparency ?

I disagree with this. Bitcoin should be private and fungible, and Lightning offers significant privacy improvements. It is a plus.

I might not understand well the final process of registration of the balance sheet on the blockchchain, will it show all transactions between Alice and Bob ?

So many questions   Thanks all.

Think of Lightning as going to a bar. You go to the bartender and open a tab. When the bar closes you settle your tab and leave.

[HeRetiK]

Blockchain should be transparent and be able to register all transactions. If LN allows off-chain small transactions for performance purpose, fine, but how to ensure transparency ?

I disagree with this. Bitcoin should be private and fungible, and Lightning offers significant privacy improvements. It is a plus.

To add to that: Anyone who wants to continue sending transparent Bitcoin transactions can do so by staying on-chain. Anyone who wants to remain private would currently either use a tumbler or not use Bitcoin to begin with. In other words, neither transparency nor privacy can be forced by an outside party, regardless of LN's existence.

Either way, I'd also argue that cryptocurrencies should stay private, where possible. The way I see it the main reason for transaction transparency is to ensure that the money supply is not manipulated. If we can ensure the integrity of Bitcoin's money supply without depending on transparency I see little reason not to do so.

[Xynerise]

Hi,

How to see transactions that occured in the off-chain part ?

You can't. That's the beauty of the Lightning Network.
If it's direct then the counterparties in the transaction -- and only they-- can see it because THEY made the transaction.
If it's a routed payment then it's impossible to know the sender of recipient of the transaction because the Lightning Network employs Onion Routing similar to TOR.
Intermediate hops do not know their position in the route, they don't know about other intermediaries apart from their predecessors and successor and they don't know if the predecessor is the original sender or if the successor is the recipient.

I understand LN will register finally the balances on the blockchain, but what about all the small transactions during the off-chain process ?

Like I said above,channel  state changes re only available to the main counterparties in the transaction -- intermediaries and observers are not privy to this information.

Will there be a blockchain.info like tool to explore all transactions ?

As explained above the lightning network can't have a block explorer to explore all transactions, however, there are lightning Graph explorers that show information and stats about the nodes on the network.
My favourite is http://1ml.com

Blockchain should be transparent and be able to register all transactions. If LN allows off-chain small transactions for performance purpose, fine, but how to ensure transparency

A lightning network transaction/channel is a smart contract between two people, and each state change (commitment transaction) is a signed bitcoin transaction so it has all the properties of a bitcoin transaction:  the message was created by a known sender (authentication), that the sender cannot deny having sent the message (non-repudiation), and that the message was not altered in transit (integrity).

I might not understand well the final process of registration of the balance sheet on the blockchchain, will it show all transactions between Alice and Bob ?

So many questions  Thanks all.

The final transaction/ channel close transaction is just another bitcoin transaction that updates the balances between the wallets of the participants.
You'll just see a transaction paying 2 addresses different amounts of bitcoin "from" a multisig address.
Whatever took place in the Lightning Network is not visible.

[FrueGreads]

I don't really have anything to add to the question made by echbit18 since it has already been answered by several users, and it looks quite clear to me, but I would like to add another question, related to regulation. I do like to level of privacy offered by the lightning network, and I also agree that this is a plus to the system, but wont this make it harder for governments to try to regulate bitcoin. We now can have thousands of of-chain transaction that will not be visible to anyone so how will taxes be charged, and how will KYC measures be implemented?

Is the track of the "final transaction" to the blockchain enough (when the channel is closed)? As far as I know several people can use one channel so when the channel is closed we won't be having enough information to know who did what. Although this is a good thing, assuming wwe are not bad people and we are not doing anything wrong, but can't it be exploited?

[HeRetiK]

I don't really have anything to add to the question made by echbit18 since it has already been answered by several users, and it looks quite clear to me, but I would like to add another question, related to regulation. I do like to level of privacy offered by the lightning network, and I also agree that this is a plus to the system, but wont this make it harder for governments to try to regulate bitcoin. We now can have thousands of of-chain transaction that will not be visible to anyone so how will taxes be charged, and how will KYC measures be implemented?

The privacy aspect of LN will likely have little effect on how taxes are charged. Even as of now tax authorities have to rely on their citizens to report applicable income truthfully. Prosecution of tax evasion may be easier with on-chain transactiosn, but that doesn't release one from the legal duty of reporting taxable events, no matter how the transaction was sent or received.

The KYC part is a bit more tricky and there has been a handful of discussions about this already.

Two worries that come up regularly:

1) Running a LN node classifies as acting as a money transmitter, making it defacto illegal to run a LN node as a regular, unlicensed user.

2) Exchanges won't be legally able to accept Lightning transactions using their own LN nodes because they would be required by law to apply full KYC / AML policies on all in- and out-going transactions -- including routed ones -- which is technically unfeasible.

I don't think 1) will will ever come to pass, but may indeed cause trouble in some jurisdictions. Stranger things have happened. 2) we'll find out once the first exchange has consulted with their legal team and starts accepting LN deposits -- or not.

Is the track of the "final transaction" to the blockchain enough (when the channel is closed)? As far as I know several people can use one channel so when the channel is closed we won't be having enough information to know who did what. Although this is a good thing, assuming wwe are not bad people and we are not doing anything wrong, but can't it be exploited?

Enough for what? For deducing which transactions were made? Within certain limits, probably. In full, probably not.

Exploited for what, illegal, private transactions? Sure. But would this be a reason for giving up privacy altogether? Criminals will always find a way to stay private. Let's give everyone else a chance to stay private as well.

[chennan]

Blockchain should be transparent and be able to register all transactions. If LN allows off-chain small transactions for performance purpose, fine, but how to ensure transparency ?

I disagree with this. Bitcoin should be private and fungible, and Lightning offers significant privacy improvements. It is a plus.

To add to that: Anyone who wants to continue sending transparent Bitcoin transactions can do so by staying on-chain. Anyone who wants to remain private would currently either use a tumbler or not use Bitcoin to begin with. In other words, neither transparency nor privacy can be forced by an outside party, regardless of LN's existence.

Either way, I'd also argue that cryptocurrencies should stay private, where possible. The way I see it the main reason for transaction transparency is to ensure that the money supply is not manipulated. If we can ensure the integrity of Bitcoin's money supply without depending on transparency I see little reason not to do so.

I feel that there shouldn't be optional privacy with a currency, and therefore is the hole in the whole lightning network plan.  If you want the end result for having Bitcoin to be fungible then you need to have every single transaction to not have the ability to be traced which ultimately leads to coins being "tainted" and viewed to be dirty and not accepted at exchanges.

I might not understand well the final process of registration of the balance sheet on the blockchchain, will it show all transactions between Alice and Bob ?

So many questions  Thanks all.

Think of Lightning as going to a bar. You go to the bartender and open a tab. When the bar closes you settle your tab and leave.

Having any form of centralization, which would be the bartender in this case, that needs to verify settlement of the ledger then I have issues...

I'm sorry, honestly I'm not really that read up on how LN works because whenever I read about this part that seems to be a form of centralization, my mind doesn't find it interesting anymore.  Who would be the "bartender"?

[HeRetiK]

To add to that: Anyone who wants to continue sending transparent Bitcoin transactions can do so by staying on-chain. Anyone who wants to remain private would currently either use a tumbler or not use Bitcoin to begin with. In other words, neither transparency nor privacy can be forced by an outside party, regardless of LN's existence.

Either way, I'd also argue that cryptocurrencies should stay private, where possible. The way I see it the main reason for transaction transparency is to ensure that the money supply is not manipulated. If we can ensure the integrity of Bitcoin's money supply without depending on transparency I see little reason not to do so.

I feel that there shouldn't be optional privacy with a currency, and therefore is the hole in the whole lightning network plan.  If you want the end result for having Bitcoin to be fungible then you need to have every single transaction to not have the ability to be traced which ultimately leads to coins being "tainted" and viewed to be dirty and not accepted at exchanges.

Excellent point.

On the other hand I'm not sure if, in the long run, a fully anonymous cryptocurrency would not simply get banned from (KYC/AML compliant) exchanges altogether. Especially since transparent alternatives exist. So far privacy-focused cryptocurrencies have been left alone, but who knows if it stays that way once they grow big enough.

If the majority of people use LN for their everyday transactions the question of "taint" may become moot either way, since it would affect most of the available money supply.

Having any form of centralization, which would be the bartender in this case, that needs to verify settlement of the ledger then I have issues...

I'm sorry, honestly I'm not really that read up on how LN works because whenever I read about this part that seems to be a form of centralization, my mind doesn't find it interesting anymore.  Who would be the "bartender"?

Ooooh but that's the beauty of LN! The bartender is... the Bitcoin blockchain.

You open your tab with the Bitcoin blockchain, you close your tab with the Bitcoin blockchain. That's it. Just some bits of smart-contract magic and PoW as we know and love.

The only difference between the Bitcoin blockchain and your usual bartender is that the Bitcoin blockchain is incredibly distrustful and asks you for an advance deposit. But hey, being distrustful is part of a blockchain's job. And you can still use your money any way you like.

[chennan]

To add to that: Anyone who wants to continue sending transparent Bitcoin transactions can do so by staying on-chain. Anyone who wants to remain private would currently either use a tumbler or not use Bitcoin to begin with. In other words, neither transparency nor privacy can be forced by an outside party, regardless of LN's existence.

Either way, I'd also argue that cryptocurrencies should stay private, where possible. The way I see it the main reason for transaction transparency is to ensure that the money supply is not manipulated. If we can ensure the integrity of Bitcoin's money supply without depending on transparency I see little reason not to do so.

I feel that there shouldn't be optional privacy with a currency, and therefore is the hole in the whole lightning network plan.  If you want the end result for having Bitcoin to be fungible then you need to have every single transaction to not have the ability to be traced which ultimately leads to coins being "tainted" and viewed to be dirty and not accepted at exchanges.

Excellent point.

On the other hand I'm not sure if, in the long run, a fully anonymous cryptocurrency would not simply get banned from (KYC/AML compliant) exchanges altogether. Especially since transparent alternatives exist. So far privacy-focused cryptocurrencies have been left alone, but who knows if it stays that way once they grow big enough.

If the majority of people use LN for their everyday transactions the question of "taint" may become moot either way, since it would affect most of the available money supply.

There are already exchanges that are starting (?) to gain some popularity that are completely decentralized and somewhat anonymous there self either by the software or method of payments.  Localbitcoins (not decentralized) uses P2P means of exchange (meetup with cash, cash in mail, cash deposits, etc.) which allows more anonymity in the eyes of the government.  ... Also you have bisq.io which uses Tor and run through your own nodes (decentralized) and allows paying through somewhat similar means to localbitcoins.

Point being I wouldn't necessarily be holding up the white flag in hopes of a truly anonymous currency being able to thrive in a massive KYC/governmental regulatory overhaul of the cryptocurrency markets.  The game is still early, who knows what will happen

Having any form of centralization, which would be the bartender in this case, that needs to verify settlement of the ledger then I have issues...

I'm sorry, honestly I'm not really that read up on how LN works because whenever I read about this part that seems to be a form of centralization, my mind doesn't find it interesting anymore.  Who would be the "bartender"?

Ooooh but that's the beauty of LN! The bartender is... the Bitcoin blockchain.

You open your tab with the Bitcoin blockchain, you close your tab with the Bitcoin blockchain. That's it. Just some bits of smart-contract magic and PoW as we know and love.

The only difference between the Bitcoin blockchain and your usual bartender is that the Bitcoin blockchain is incredibly distrustful and asks you for an advance deposit. But hey, being distrustful is part of a blockchain's job. And you can still use your money any way you like.

That's pretty cool... I'm not that knowledgeable of the hash function and cryptography of how that would work, but look forward to reading more about it.

[HeRetiK]

Excellent point.

On the other hand I'm not sure if, in the long run, a fully anonymous cryptocurrency would not simply get banned from (KYC/AML compliant) exchanges altogether. Especially since transparent alternatives exist. So far privacy-focused cryptocurrencies have been left alone, but who knows if it stays that way once they grow big enough.

If the majority of people use LN for their everyday transactions the question of "taint" may become moot either way, since it would affect most of the available money supply.

There are already exchanges that are starting (?) to gain some popularity that are completely decentralized and somewhat anonymous there self either by the software or method of payments.  Localbitcoins (not decentralized) uses P2P means of exchange (meetup with cash, cash in mail, cash deposits, etc.) which allows more anonymity in the eyes of the government.  ... Also you have bisq.io which uses Tor and run through your own nodes (decentralized) and allows paying through somewhat similar means to localbitcoins.

Point being I wouldn't necessarily be holding up the white flag in hopes of a truly anonymous currency being able to thrive in a massive KYC/governmental regulatory overhaul of the cryptocurrency markets.  The game is still early, who knows what will happen

LocalBitcoins already had to close shop in some jurisdications (eg. Germany) due to regulatory problems. In the US there have been arrests of LocalBitcoins traders for illegal money transmitting services.

On the other hand we are seeing the first decentralized exchanges coming up, so I guess the game is on?

It is indeed too early to tell. And Bitcoin development is edging towards increased privacy either way (Schnorr Signatures + CoinJoin, Bulletproofs) so who knows what we'll end up with.

Having any form of centralization, which would be the bartender in this case, that needs to verify settlement of the ledger then I have issues...

I'm sorry, honestly I'm not really that read up on how LN works because whenever I read about this part that seems to be a form of centralization, my mind doesn't find it interesting anymore.  Who would be the "bartender"?

Ooooh but that's the beauty of LN! The bartender is... the Bitcoin blockchain.

You open your tab with the Bitcoin blockchain, you close your tab with the Bitcoin blockchain. That's it. Just some bits of smart-contract magic and PoW as we know and love.

The only difference between the Bitcoin blockchain and your usual bartender is that the Bitcoin blockchain is incredibly distrustful and asks you for an advance deposit. But hey, being distrustful is part of a blockchain's job. And you can still use your money any way you like.

That's pretty cool... I'm not that knowledgeable of the hash function and cryptography of how that would work, but look forward to reading more about it.

Bitcoin Magazine has a fairly comprehensive article series on the workings of the Lightning Network:

https://bitcoinmagazine.com/articles/understanding-the-lightning-network-part-building-a-bidirectional-payment-channel-1464710791/

It's a lot to take in at first but helps a lot with getting familiar with some of the concepts involved.

[buwaytress]

I do like to level of privacy offered by the lightning network, and I also agree that this is a plus to the system, but wont this make it harder for governments to try to regulate bitcoin. We now can have thousands of of-chain transaction that will not be visible to anyone so how will taxes be charged, and how will KYC measures be implemented?

The onus is on governments if they should choose to attempt to regulate Bitcoin (they can't, anyway). Regulations so far have started with exchanges and it's not unforeseeable in future that some would require exchanges to make available their LN txs. I can also foresee exchanges or hubs requiring users to perform KYC before accepting to open channels with them.

As HeRetiK points out too, tax/revenue bodies still rely on individuals for reporting. So far, IRS in the US is going after those who didn't report. Whether or not those who did/do report are doing so truthfully...

Not sure if simply running an LN node would qualify any entity as a money transmitter... otherwise barkeeps are money transmitters for opening tabs. And all of those mom and dad shops who do the same with regular customers. Volume and if it is a significant commercial activity as with exchanges might be extra considerations.

[FrueGreads]

The KYC part is a bit more tricky and there has been a handful of discussions about this already.

Two worries that come up regularly:

2) Exchanges won't be legally able to accept Lightning transactions using their own LN nodes because they would be required by law to apply full KYC / AML policies on all in- and out-going transactions -- including routed ones -- which is technically unfeasible.

2) we'll find out once the first exchange has consulted with their legal team and starts accepting LN deposits -- or not.

I heard coinbase said that they would not have problems in terms of license/legislation if they were going to run LN nodes. Maybe it was just rumors, since I didn't saw that on official channels, and it was just on "bitcoin news sites", so I can't say if it was true or not.

Enough for what? For deducing which transactions were made? Within certain limits, probably. In full, probably not.

Yes, and when I asked this I was thinking about that. Maybe there was a way for the one running the node to keep track of what was made, in the channel, and it would be possible to provide information for governments, police etc, if it was extremely necessary. This would not be perfect but maybe it would be a middle term in terms of regulation or something like that. I guess most people would not worry much about this, since they wouldn't be doing anything wrong, and no one would bother with their transactions, but it would probably keep criminals away, since they were not completely "hidden".

Exploited for what, illegal, private transactions? Sure. But would this be a reason for giving up privacy altogether? Criminals will always find a way to stay private. Let's give everyone else a chance to stay private as well.

Well you are right. The thing is that I'm not sure bitcoin will find a way as a currency, if it manages to completely escape government regulation, and legislation. And right now, even though it's not entire correct, a lot of bitcoin haters still use the "criminal activities" as an argument against bitcoin.

[jnano]

We now can have thousands of of-chain transaction that will not be visible to anyone so how will taxes be charged, and how will KYC measures be implemented?

Also currently Bitcoin can't always be traced. You need to be able to link real identities to transactions, and in many or most cases you can't do that.

[HeRetiK]

Enough for what? For deducing which transactions were made? Within certain limits, probably. In full, probably not.

Yes, and when I asked this I was thinking about that. Maybe there was a way for the one running the node to keep track of what was made, in the channel, and it would be possible to provide information for governments, police etc, if it was extremely necessary. This would not be perfect but maybe it would be a middle term in terms of regulation or something like that. I guess most people would not worry much about this, since they wouldn't be doing anything wrong, and no one would bother with their transactions, but it would probably keep criminals away, since they were not completely "hidden".

There may be an opening for correlation attacks, as to deduce which transactions were made. Question being whether such an attack would be feasible.

When trying to unravel LN's transaction history, an adversary is facing the following challenges:

1) Each node only routes a fraction of the network's traffic

2) Payments are routed in an onion style akin to TOR, ie. encrypted in layers in a way that prevents a routing node from knowing the initial sender and the final recipient.

It follows that an adversary can only indirectly derive transaction amount, sender and receiver by a) watching on-chain settlements and b) keeping track of their LN nodes' channel states (ie. where payment flow in their immediate neighbourhood and at which time).

a) is public but alone largely insufficient, b) requires control over a large number of LN nodes.

The more nodes an adversary controls, the less holes they have in the global transaction history, the more precise they can derive money flows. Owning 100% of nodes gives obviously full knowledge but is also pointless, as there would be no one left to be monitored. Owning 1% of nodes will probably give close to no usable information. The sweet spot will lie somewhere inbetween, but whether it's actually viable is a different question.

We now can have thousands of of-chain transaction that will not be visible to anyone so how will taxes be charged, and how will KYC measures be implemented?

Also currently Bitcoin can't always be traced. You need to be able to link real identities to transactions, and in many or most cases you can't do that.

True, but keep in mind that most taxable events are fiat trades anyway. And those are largely linked to real identities.

[jnano]

But then, that's true also if LN was used in the middle. The fiat conversion will go through a body that keeps track of events and identities.