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Bitcoin LN 101
On one hand, privacy is extremely important when it comes to blockchain transactions. On the other, the Lightning Network isn’t perfect, and neither is Blink. That shouldn’t stop anybody from using them. If you’re aware of their limitations and the advantages they bring, both are extremely useful tools. To understand this, we have to consider the various privacy threats and their respective weight and relevance.
Additionally, the Lightning Network and Blink are orders of magnitude more private than the tools we previously had for the same use cases. Blink is a custodial wallet, but it just works, and it works well. Plus, as we will prove later, it can significantly increase your privacy. The Lightning Network is complicated and channels are hard to balance, but the fact is that it’s the tool that transformed Bitcoin into a real medium of exchange.
It’s as Kemal Yasar, Blink’s Marketing Director, told us:
“Privacy is a nuanced topic. There are various degrees to it, and different threat models. Blink solves many of them (e.g. payer privacy with Blink is better than Mastercard), but not all, like privacy focused wallets choose to focus on.”
In the following article, we’ll explain the concept further and present use cases in which paying with Blink is a privacy improvement over the alternatives.
You’ve probably heard it before, but understanding this concept is crucial to understanding privacy threats: Bitcoin is not anonymous, it’s pseudonymous. To explain this classic Bitcoin maxim, let’s quote the Bitcoin Design Guide:
“It’s a common misconception that bitcoin payments are anonymous. Rather, bitcoin payments are pseudonymous, meaning no identifiable information is tied to transactions. Unless ownership is revealed, whether by the parties involved or some third-party, payments remain anonymous.”
The Bitcoin blockchain, on the other hand, is a public ledger that contains all transactions and is available 24/7. That means, if an account is linked to you, all of your financial movements could be tied to your identity. This is the reason KYC and AML procedures shouldn’t apply to Bitcoin.
This anti-KYC concept is present in Bitcoin from the very beginning and is key to its inception and reason-to-be. In the whitepaper, Satoshi Nakamoto wrote:
“The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone. This is similar to the level of information released by stock exchanges, where the time and size of individual trades, the "tape", is made public, but without telling who the parties were.”
How can we let politicians and police states know about this? We probably can’t. The quest for privacy is in our hands.
To explore other privacy risks that exposing information brings, let’s check on the Bitcoin Design Guide once again:
“Exposing wallet information to others around you can be a problem in terms of security and privacy, as well as personal comfort. Sensitive information includes:
Wallet Balance - shows how much is owned
Transaction history - reveals payment partners and purposes
Addresses - can be used to track on-chain transaction history
Invoices - can be used to track lightning payment history
Recovery phrase - can be used to access and transfer bitcoins.”
The Lightning Network only uses the Bitcoin blockchain two times: when you open a channel and when you close it. There’s a privacy risk that shouldn’t be underestimated both times, but other than that, what happens in the network stays in the network. The privacy risk only comes into play if the sats you use to open the channel come from a KYC exchange. If that’s the case, Voltage explains what happens:
“On-chain data will show a 2 of 2 multisig transaction, which looks much different than a normal single sig transaction on-chain. If you open a channel with a unique amount of sats, such as 4,325,212, it is now possible for that kyc exchange to find your node’s alias and pubkey and more information. They can do this by searching new channels in the network with that balance in a certain timeframe, and then tie that node alias/pubkey directly to your name.”
Another necessary clarification is that invoices “can be used to track lightning payment history” only if you’re using your own node and send them to a person who knows your identity. This is because the receiver will know the pubkey of your node, and with that:
“They can access public lightning databases such as Amboss, and see all of your channels and their total capacities. It is important to note that they will NOT be able to see the amount of funds that you specifically control. They will only be able to see the total of your node and your peer’s node.”
This is another use case in which Blink can help: use it to receive funds, then send them to your node, and you won’t reveal the node’s pubkey.
Anyway, speaking of Blink and addresses, let’s “address” the elephant in the room.
For its part, Blink is a custodial wallet, and it's linked to your phone or email. The main reason for this is account recovery. If a phone breaks or gets lost, the user can download Blink on a new device, punch in their phone number, and receive OTP via SMS. The practice also helps Blink comply with Salvadoran laws, where accounts at financial service providers can’t be anonymous.
As Kemal puts it, Blink is limited by the “technically possible solutions, and the feasibility of these solutions in the real world.” The company values privacy as much as any Bitcoiner, but still has to exist within a legal framework that’s outside of its control. Back to Kemal:
“We're attempting to strike a reasonable balance that lets users preserve as much privacy as possible while operating under and reconciling other constraints that exist in the real world, whether they are of pedagogical or legal nature.”
Limitations aside, there are many use cases in which using Blink and the Lightning Network is a significant privacy improvement. Let’s list a few, but first…
The “systemsellers" concept comes from video game culture; it refers to an exclusive and often revolutionary video game or software that drives the sales of a console. These games have such mass appeal that the public simply must have them, so systemsellers drive hardware sales and establish a strong install base. Some examples from history are: “Tetris” for the Nintendo Game Boy, “Halo: Combat Evolved” for the Microsoft Xbox, and “Wii Sports” for the Nintendo Wii.
When it comes to Bitcoin, there are services that you can only get privately with BTC, and the benefits are so great that people will have to get Bitcoin just for these use cases. Think about it, if someone doesn’t use Bitcoin to get the services below, what can they use? Every other option gets them doxxed and puts them on a list.
This is a controversial example from Bitcoin’s past, but Silk Road was a systemseller for Bitcoin. The only way to access everything that was for sale in the dark web’s open bazaar was by using BTC, so clients had to learn how to use it and ended up adopting the Bitcoin system.
That was the past, though. What current-day systemsellers have we identified?
Pay for these services with Lightning to increase your privacy:
Be aware, the solutions above aren’t 100% effective. We’re talking about increasing your privacy here, not about completely hiding your identity. Governments and spy agencies like Chainalysis could still track you down if your OPSEC isn’t as pristine as Satoshi Nakamoto's.
However, a step forward is a step forward. A custodial wallet like Blink can help you obscure your tracks and gain a little more privacy.
The secondary point of this article was the systemsellers concept. Are people aware that they could get even more privacy from their VPN if they pay with Bitcoin? Do people care that AI companies could link their identity to their questions and prompts? They should care, sure, but do they? Those are the questions that the next few years will answer.
Are privacy increases as good a systemseller as a dark net market like Silk Road? Probably not, but they could still do tremendous damage. Let’s keep an eye on this Bitcoin use case, and if you know a no-coiner who could benefit from these privacy increases, send him or her this article. It might orange-pill him or her in the most beautiful way.
