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Patching the Lightning Network

Eltoo protocol could be the answer to unleashing the full potential of the Lightning Network

As the beta implementation of the Lightning Network sends the first transactions across the blockchain, two developers have published a research paper proposing an important modification.

By its proponents, the Lightning Network is touted as Bitcoin’s saviour, potentially solving the scaling issues that prevent the blockchain from processing the number of transactions per second that would allow it to compete with the likes of Visa and Paypal.

However, the network is not without its problems, and despite promises of significantly boosting bitcoin’s capacity, the network itself requires users to store a significant amount of data, making it difficult to download and run.

As such, Lightning Labs Olaoluwa Osuntokun, and Blockstream’s Christian Decker and Rusty Russell, have published a new proposal. Eltoo—the phonetic spelling of ‘L2’, or layer two—imagines an alternative, "simplified" way of making off-chain transactions.

“A simple, yet powerful, renegotiation and invalidation mechanism for off-chain protocols and smart contracts. Eltoo is much simpler to implement and easier to analyze than previous protocols, can be easily extended to any number of participants and has a very small footprint.”

The Eltoo protocol claims to not only create a faster and more efficient Lightning Network, but also solve its biggest ongoing issue, whereby a user can broadcast an old version of the settlement-transaction to the network, rather than the latest version. To understand further, we need to revisit the fundamentals.

Lightning basics

Released in January 2016, the LN proposal described an off-chain solution that would allow Bitcoin to be used for micropayments, like buying a cup of coffee. Prior to this, small purchases could command unacceptably high fees..

The mechanism can be conceptualised as two parties entering into a contractual agreement that is referred to as a “payment channel.”

Both parties stake one bitcoin, for example, in order to open an offchain “payment channel”, which then allows both parties to send money between each other instantly with no fees. As this does not rely directly on the main blockchain, it adds less strain to the network and so incurs lower fees.

As long as the payment channel remains open, transactions can continue to be made by drawing from the initial stake of one Bitcoin, and are all recorded on a separate ledger off-chain.

Each transaction in the payment channel is recorded on this separate ledger, but isn’t broadcast to the blockchain until the “payment channel” is closed.

Should one of the transactors try to cheat by broadcasting an outdated channel balance, which would pay them more than they are due, then they would be penalized by losing all of the staked funds to the other party.

However, this raises a problem as an incorrect payment balance may not result from malicious intent, but from a bug in the software, which would still result in the innocent party losing their entire channel balance.

The Eltoo solution

Eltoo proposes a solution to this problem by continuously updating payment channel balances off-chain, but when the channel is closed, confirming only the last settlement-transaction and closing balance to the blockchain, instead of the whole record.

This acts as a “mechanism that defers final settlement”, so if one party tries to cheat by presenting an outdated transaction during settlement, the other side is given some time to transmit the latest transactions that would show this data to be incorrect.

eltoo

This process is described in the blockstream blog post using an analogy—as if both off-chain transactors were contractual partners, and the blockchain was the court.

“We can imagine off-chain negotiation as a contractual agreement between a number of parties and settlement as presenting the case to a court that will decide the final state — the court in this case being the blockchain. Since all updates happen off-chain, we need a way for the on-chain court to hear all sides of the argument before making a final judgement. In the case of a participant initiating settlement of the contract, we need a mechanism that defers final settlement, to give the counterparty a chance to provide a more recent state.”

As developer C Decker elaborated on Reddit, aside from addressing this issue, the other most notable advantage of the protocol is that it stores only the most recent off-chain transaction data, thereby reducing storage costs, and making for easier backups.

Another fork?

Decker also stated that before Eltoo can be implemented, a change must be made to the Bitcoin protocol, by introducing the “SIGHASH_NOINPUT” flag for signatures.

This can only be achieved via a soft fork, which could itself prove controversial. Despite the contentious Bitcoin Cash hard fork of last year, there still remains contention as to whether on-chain, or off-chain scaling solutions offer the best way forward for Bitcoin.

Eltoo protocol could be the answer to unleashing the full potential of the Lightning Network


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