Lightning Network payment channels work by enforcing a “fairness protocol” – a set of rules that incentivize honest collaboration between channel partners. After funding a channel, payments flow off-chain between peers. Those payments are valid, signed bitcoin transactions that spend the funding transaction output and reflect the current state of the payment channel. We call these off-chain Bitcoin transactions “commitment transactions”.
In the image above, for example, Alice and Bob open a payment channel by making an on-chain transaction (Funding Transaction). Initially, Alice’s balance in this payment channel is 1 BTC, and Bob’s balance is 0. The first commitment transaction they make is a refund to Alice; after that, they make three payments:
- Alice pays Bob 0.1 BTC (Commitment Transaction #2).
- Alice pays Bob 0.4 BTC (Commitment Transaction #3).
- Bob pays Alice 0.2 BTC (Commitment Transaction #4).
But remember: each commitment transaction is a valid, signed Bitcoin transaction. This means that, at any point, Alice or Bob can broadcast one of the commitments into Bitcoin’s blockchain. This has to be done this way because if that weren’t the case, Bob could vanish and Alice couldn’t close the payment channel and get her money back.
But what if Bob tries to cheat on Alice by broadcasting an old commitment transaction that doesn’t reflect the actual channel balance anymore (Commitment Transaction #3, for example)? The Lightning protocol solved this issue by providing a way for Alice to reclaim all of the funds locked in the payment channel if she detects that Bob is trying to cheat on her.
In simple terms, each party holds a slightly different version of the commitment transaction, where the output for him or herself has two different spending conditions. It can either be spent by the party that holds the transaction after a certain amount of time or it can be spent immediately by the other party by presenting a special “revocation ” key.
If Alice sees Bob’s commitment transaction on Bitcoin’s blockchain, she has a time frame of 500 blocks to send a penalty transaction and get all the channel funds back to her by using her revocation key.
This might sound reasonable, but what if Alice cannot publish her penalty transaction for some reason? For example, she could have internet issues or live in an area with regular power outages. If Alice cannot publish her penalty transaction in that 500-block period then Bob successfully cheated on Alice and stole her funds.
What are Watchtowers?
Watchtowers protect nodes in situations like the above example, where one channel partner is trying to cheat by broadcasting an old commitment transaction and the other party cannot publish the penalty transaction. If Alice has watchtowers for her node, she has extra protection against dishonest channel partners.
There are two types of watchtowers: altruistic watchtowers and reward watchtowers. Altruistic channel partners return all of the victim’s funds (minus on-chain fees), and reward watchtowers negotiate a portion of the channel funds as a reward for protecting their clients.
How do Watchtowers work?
Before we see how a Watchtower works, let’s clear out some terminology:
- Watchtower: the node providing the service, watching the blockchain, and responding to channel breaches on behalf of its clients.
- Clients: Lightning nodes that connect to a watchtower and are safeguarded by it.
- Breach transaction: the cheater transaction, a revoked commitment transaction.
- Penalty transaction: the transaction that punishes the cheating party, claiming all the funds to an address controlled by the cheated party.
The process starts with a client connecting to a watchtower. Both parties will negotiate terms about the watchtower’s service for this specific client. The most simple service is having the watchtower watch for breach transactions and broadcast a penalty transaction in case of a breach. There’s also a service that does the same thing as the former, with the added benefit of providing signed receipts for its clients that contain verifiable evidence that the client hired the watchtower.
Signed receipts serve as an accountability mechanism for the watchtower clients. If the watchtower fails to detect the breach or broadcast the penalty transaction, the client will have evidence that the watchtower failed to fulfill its duty.
After a successful connection, the client will constantly update the watchtower for every new commitment transaction on any of the client’s channels. The watchtower needs these constant updates to know what transactions to look for in the mempool and the blockchain.
More specifically, for every channel update, the client will send the watchtower an “appointment” message that contains (among other things) the following:
- A locator: the first half of the transaction ID for a revoked commitment transaction;
- An encrypted “blob”: the encrypted penalty transaction for that revoked transaction;
- A start block: a block for the watchtower to start its search for the locator;
- An end block: the block where the watchtower can stop looking for that specific locator;
Note that the client sends an encrypted penalty transaction and only the first half of the transaction ID as a locator. The benefit of sending an encrypted penalty transaction is protecting the client’s privacy. The watchtower can only decrypt the penalty transaction with the entire transaction ID of the breach transaction, which ensures that the watchtower only gains information about the channel balances of its clients in case of a channel breach.
Now, the Watchtower will watch the mempool and start scanning the blockchain at the block specified by the client, searching for the provided locator. If it finds it, it’ll use the other half of the transaction ID to decrypt the penalty transaction and broadcast it on behalf of the client.
How to connect to watchtowers
Each lightning node implementation has its particular way of setting up a watchtower; you can check out LND docs, for instructions on connecting to a watchtower using LND. Furthermore, if you want to connect with a watchtower we recommend the Lightning Network+ watchtowers.
If you’re running CLN, you can use its plugins to add a watchtower client, such as the popular “The Eye of Satoshi” client. You can check out the documentation on how to set up the client as a CLN plugin on their GitHub page.
How to run a Watchtower
Suppose you’re interested in running your watchtower to safeguard other lightning nodes. In that case, you can also use The Eye of Satoshis software, but in this case, you’ll use the watchtower software itself, not the client mentioned in the section above. You can read the instructions on how to set it up here.
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