The Lightning Network is best known for its fast and cheap payments. But the Layer 2 protocol could also offer more privacy than on-chain payments, since transactions are not published on Bitcoin’s blockchain, blockchain analysis is largely impossible.
The Lightning Network does present its own privacy risks, however. Payments are routed over a network of users, and nothing stops spies from participating in this process of forwarding transactions while monitoring the flow of funds. On the Lightning Network, blockchain analysis can be substituted for network analysis.
There are some solutions to limit these risks, like Tor-style onion routing[1]. These help, but, depending on network topology and types of payments, weaknesses can remain. The Bitcoin and Lightning developer going by the pseudonym ZmnSCPxj has, in recent weeks, published extensive analysis of persisting risks on the Lightning-dev mailing list[2] (1, 2, 3).
Based on his analysis, ZmnSCPxj also offered a solution. Similar to Payswap[3] — his proposal for on-chain privacy, covered by Bitcoin Magazine two weeks ago — the developer thinks that “self-payments” could be an important part of the privacy puzzle.
Understanding Self-Payment
In a previous article[4], we discussed Payswap, a proposal by ZmnSCPxj to improve on-chain privacy by seemingly inverting the relation between payer and payee. ZmnSCPxj actually initially came up with this idea in the context of the Lightning Network. In fact, it would probably be of even better use on the Lightning Network: Some of the trade-offs embedded in the on-chain alternative do not apply on the Layer 2 protocol.
In short, for the Lightning version of Payswap, the self-payment is part of the same payment route.
To explain how this works, let’s look at an
