What do you guys think about this idea for consolidating UTXOs while retaining privacy?
I think that some people used LN in similar way like this for improving privacy, but maybe you don't know that Chainalysis launched support for Lightning Network in December of last year.
I don't know how exactly this tracking works and how effective it is, but I am sure governments are paying them a lot and they noticed LN can be used like this.
https://blog.chainalysis.com/reports/lightning-network-support/That's true, but I don't really believe they can meaningfully track off-chain transactions. If it turns out that they try, it can and will be mitigated e.g. by banning nodes sending suspicious 'probe' payments and such.
Boltz looks like a interesting non custodial exchange for privacy, and it's better if you use Tor onion service, but I never used it myself.
How much fees they are charging?
I used it a few times, through Breez and natively, and I remember fees weren't too high; but I can't recall how much they were.
3) Submarine swap the whole amount out into a new on-chain address using the same service as in step 1.
This would be unnecessary. If all the transactions were sent to a single channel, you could simply close the channel.
That's also true, yes, but if you receive money through LN, the payment is usually split up and received via multiple of your open channels. To get all the funds out, you would need to close all the channels (since you can't control how much you get on which channel) and then reopen them all; at that point it's cheaper to use submarine swaps.
A concern of mine is that boltz.exchange would know about your transactions. It is possible Chainalysis could ask about a transaction and there is no guarantee they would not provide information.
How would they know that? Boltz is just going to receive sats through a channel they have with
someone (they can't look further past that last 'hop') or actually multiple channels, as explained above, and will send the full amount to an on-chain address. Boltz does not know who the sender is.
How much fees they are charging?
They haven't addressed that properly in their FAQ section. It only says that the user needs to pay the on-chain mining fees for the Submarine Swaps. But there is an additional
undisclosed fee based on a percentage of the traded amount. And they don't mention what percentage, only that this is the fee their profits originate from.
The mining fees as they stand now are 0.00000582 BTC, for example.
So if you wanted to swap 0.1 BTC for LN BTC, you would get 0.09949418 BTC.
Quick maths would suggest it's 0.5%, right? That's not bad.. Centralized exchanges charge between 0.1% (but require withdrawal fee) and 1% (but no fees - if I remember correctly) and are obviously completely non-private.
So if you wanted to swap 0.1 BTC for LN BTC, you would get 0.09949418 BTC.
What? Over 50k sats? That's the problem with LN fees in typical wallets: if you have small amounts, then on-chain fees (for example Phoenix wallet that charge 3k sats) will eat that amount.
You pay that fee to Phoenix just once though; then you can send and receive over that channel however much you want; I sometimes believe people don't really 'get' LN yet because they're still stuck in 'on-chain' mindset where you only do large transactions and don't do them often, to save transaction fees. LN is different in that it encourages doing many, many transactions (receiving and sending) so that the channel creations make sense.
But if you have big amounts, then percentage fees of even 0.1% will eat more coins than people would pay on-chain. If you have even 0.1% fees, that means for each 1 BTC you have to pay 100k sats! So, I guess nothing changed and running LN node is still the cheapest option to use LN.
You could say that any service costs money (unless
you're the product) and doing stuff yourself is the cheapest. That doesn't factor in your time - not only to create and close channels in this case, but also time for learning about state channels, how they work and how to apply it in practice.
I'd still say for 99% of people it makes sense to just use Boltz exchange to anonymize their sats quickly, effortlessly, and privately without putting in too much time.
That means coin consolidation is possible in LN, but still quite expensive, when you can reach
deniability by making some on-chain transactions to yourself. I guess in typical scenario it will cost much less than over 50k sats for 0.1 BTC.
You suggest sending your own coins to yourself to get
deniability? That's terrible advice in my opinion. At least use ChipMixer or CoinJoin. However, all of these 'on-chain' methods don't solve the problem of consolidation (maybe CoinJoin) - the main thing I'm addressing is not anonymizing coins, but consolidating various UTXOs without linking them together.