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Lightning Network is a Bitcoin protocol where you can make microtransactions instantly.

The transactions on Lightning Network happen off-chain from the Bitcoins blockchain, taking the load off the main blockchain. This approach relieves the main blockchain of excessive load, ensuring smoother operation and scalability.

To initiate Lightning transactions, both parties have to open the payment channel on the network by pledging the total transaction amount they’re about to transact.

For example, if you and your friend Bob want to transact 10 BTC. Then both of you should open the payment channel by depositing the 10 BTC, so both of you transact 10 BTC worth of transactions through the channel.

The main drawback of this Lightning Network is anyone on the channel could be malicious and manipulate the transactions because the transactions are happening out of the main Blockchain.

For example, in the 10 BTC channel, the first transaction made by you sent 2 BTC to Bob, and now you have the balance of 3 BTC, and Bob has 7 BTC.

In the second transaction, Bob sent you 3 BTC. Now you have the balance of 6 BTC, and Bob remains with 4 BTC.

Now, remember you opened this channel using a multi-sig wallet. So both of you signed, and none of you received the balance amount.

The Lightning channel opens with you and Bob depositing and signing it and also closes when both of you sign it and confirm both have the balance.

So after completing the second transaction on the channel, you went on holiday for a week without closing the channel.

In this scenario, if your friend is malicious, he can put the first transaction on the network as a closing channel transaction and get the confirmation on the blockchain while you’re on holiday offline and receive 7 BTC instead of 4.

Despite the risk, the Lightning Network implements a penalty mechanism to address malicious behavior. If one participant acts maliciously, others can penalize them using the participant’s revocation key, effectively revoking a prior settlement of the channel.

Using the revocation key, one can take the entire balance of the channel and burn it. But there is a timestamp for every transaction to confirm it is authentic. On lightning channels, it usually takes 3 days to confirm a transaction by lightning nodes. So if the counterparty is offline for more than 3 days or a week, it is not possible to revoke the old transaction.

This is where Watchtowers come into play.

What Exactly Are Lightning Watchtowers?

As a name, Watchtower is a ‘watchdog’ that looks for malicious participants on the channel and penalizes them on behalf of the honest participant on the channel.

The Watchtower concept was originally conceptualized in the Lightning Network whitepaper.

In layman’s terms, Watchtower is a third-party lightning node appointed by you to watch entire lightning channels when you’re offline and penalize the counterparty if any malicious activity is spotted.

Apart from penalizing and monitoring, you can also give watchtowers the ability to broadcast the correct state of the channel when someone tries to cheat you by broadcasting the old state.

Bitcoin Watchtowers may employ various incentive models, including subscription fees or receiving a portion of transaction amounts handled through revocation keys.

In essence, Lightning Watchtowers enhance the security and integrity of Lightning channels, offering peace of mind for participants engaging in off-chain transactions.

How Does the Watchtower Work?

Every transaction in a lightning channel requires a  valid commitment that creates the current state of the channel balance. The state can be updated by either party in a channel and is updated by the next iterative commitment accompanying a transfer.

So when you make any transfer, the Lightning channel gets updated.

You give the transaction details to a Watchtower to watch the channel on your behalf.

Don’t worry. By providing the transaction details, your privacy does not get compromised.

The process works exactly like this:

• When you make a transaction in a channel, the transaction has an ID, for example‘123456789’, and you want the watchtower to have the revocation ability.

• You can encrypt the already signed revocation transaction. In this scenario, you encrypt the transaction using the second part of transaction ID ‘6789’.

• Now, you give this encrypted transaction with the first part of the transaction ID ‘12345’ to the watchtower. This ID in itself doesn’t reveal anything to the watchtower but acts as a hint for the watchtower to look out for this transaction.

• If the transaction gets broadcasted, the watchtower can recognize it using a hint or the first part of the transaction ID.

• After which, the watchtower can find out the second part of the transaction ID and decrypt the transaction and broadcast it to the blockchain.

If a watchtower detects a channel breach by a counterparty, then it constructs a penalty transaction using your hint and returns the channel funds.

Problems and Challenges Faced by Watchtower.

The major hurdle faced by the watchtowers is that all activities on the Lightning channel are not done with malicious intent.

Sometimes a human error can lead to broadcasting the invalid channel state, or a software bug in the wallet can do the same whichever is damaged is bare by the counterparty losing all the funds.

To counter these kinds of situations, developers came up with a solution called eltoo.

Eltoo is a new type of payment channel which allows any later channel state to replace any earlier channel state.

This removes the case where anyone will be penalized for a mistake or bug but still facilitates things the way they should be.

The second problem of the watchtower is it is a still growing area in the crypto space and facing challenges like monetization and scaling.

To counter the problem. There are many cloud base lightning nodes popping up and giving the watchtower facility of monetization and achieving growth in the business.

But the watchtower market is not developed yet as the LN is still progressing into a larger P2P payments network on top of Bitcoin. However, the research and innovations in the field provide some compelling narratives for a future ecosystem of LN watchtowers.

Conclusion.

Watchtowers are an emerging space in the crypto world, going through a lot of changes as time passes.

Have you thought of using watchtowers next time while making a Lightning transaction?

If yes. Then you can find many lightning nodes offering watchtower services by searching online.