Cryptocurrency - Bitcoin and the Lightning NetworkTeam 1Pr.docx

Cryptocurrency - Bitcoin and the Lightning Network
Team 1
Project Report
By
University of the Cumberlands
Cryptography
09/29/2019
1
Table of Contents
BLOCKCHAIN
BITCOIN
ADVANTAGES & DISADVANTAGES
PROBLEMS OF BITCOIN
VOLATILITY
SCALABILITY
USABILITY
BITCOIN LIGHTNING NETWORK
TIMESTAMPING
SPECIFICATIONS AND IMPLEMENTATIONS
ADVANTAGES & DISADVANTAGES OF LIGHTNING
NETWORK
CONCLUSION

Blockchain
A blockchain is a growing list of records, called blocks, that are
linked using cryptography. Each block contains a cryptographic
hash of the previous block, a timestamp, and transaction data.
Blockchain was invented by Satoshi Nakamoto in 2008.
Blockchain is considered as the most fundamental and most
important aspect of Bitcoin. The blockchain is a distributed
database of records of all transactions or digital event that have
been executed and shared among participating parties which
contains every single record of each transaction. Blockchain
Technology first came to light when a person or Group of
individuals name ‘Satoshi Nakamoto’ published a white paper
on “BitCoin: A peer to peer electronic cash system in 2008.
Blockchain Technology Records Transaction in Digital Ledger
which is distributed over the Network thus making it
incorruptible. Anything of value like Land Assets, Cars, etc. can
be recorded on Blockchain as a Transaction.” (Gupta, 2019)
3
Bitcoin
Bitcoin (₿) is a cryptocurrency. It is a decentralized digital
currency without a central bank or single administrator that can
be sent from user to user on the peer-to-peer bitcoin network
without the need for intermediaries.
How it works?
Bitcoin (₿) is a type of cryptocurrency. It is a digital currency
that is decentralized and works without a central repository

(bank) or an administrator. Funds can be sent from one user to
another on the peer-to-peer bitcoin network.
“Bitcoin uses peer-to-peer technology to operate with no central
authority or banks; managing transactions and the issuing of
bitcoins is carried out collectively by the network. Bitcoin is
open-source; its design is public, nobody owns or controls
Bitcoin and everyone can take part. Through many of its unique
properties, Bitcoin allows exciting uses that could not be
covered by any previous payment system.” (Bitcoin, 2019)
4
Advantages
1. Greater Liquidity Relative to Other Cryptocurrencies
Bitcoin in the most popular cryptocurrency, that has greater
liquidity than its peers. This allows users to retain most of its
inherent value when converting to fiat currencies, such as the
U.S. dollar and euro. On the other hand, most other
cryptocurrencies either can’t be exchanged directly for fiat
currencies or lose substantial value during such exchanges.
2. Increasingly Wide Acceptance as a Payment Method
Most of the merchants accept Bitcoin payments, it’s possible to
buy virtually any physical item using Bitcoin units. Bitcoin’s
growing mainstream acceptance is likely to be a big help, if
you’re serious about reducing your exposure to fiat currencies.
3. International Transactions Easier Than Regular Currencies
Bitcoin transactions aren’t any international transaction fees or
red tape to navigate, as is often the case with credit card
payments, ATM cash withdrawals, and international money
transfers. International credit card and ATM fees can range up
to 3% of transaction value, and sometimes higher, while money

transfer fees can be as high as 15%.
4. Generally Lower Transaction Fees
Credit cards and Paypal has high transaction fees like 2% - 3%
whereas Bitcoin comes with lower transaction fees.
5. Anonymity and Privacy Relative to Traditional Currencies
Bitcoin’s built-in privacy protections allow users to completely
separate their Bitcoin accounts from their public profile. While
it’s possible to track Bitcoin flows between users, it’s very
difficult to figure out who those users really are.
6. Independence from Political Agents and Creators
Bitcoin is also unbeholden to its creators, due to its completely
decentralized nature, popularity, and liquidity. This allows the
currencies’ creators to manipulate supply and, to an extent,
value relative to other cryptocurrencies, negatively impacting
other holders.
5
Greater Liquidity Relative to Other Cryptocurrencies
Increasingly Wide Acceptance as a Payment Method
International Transactions Easier Than Regular Currencies
Anonymity and Privacy Relative to Traditional Currencies
Thank you!!!

Cryptocurrency - Bitcoin and the Lightning Network 2
Team 1
Cryptocurrency - Bitcoin and the Lightning Network
Project Report
By
Dr. Emmanuel Udoh
University of the Cumberlands
Cryptography
TABLE OF CONTENTS:
1. Abstract3
2. Introduction to Block Chain4
3. Bitcoin4
a. What is bitcoin?4
b. Pros and Cons of bitcoin5
c. Private Keys7
d. Hashing8
4. Volatility Problem8
5. The Bitcoin Blockchain Scalability Problem10
6. Usability Problem12

7. The Bitcoin Lightning Network explained12
a. What is Lightning Network and How does this work?13
8. Instant Payments16
9. Micropayments16
10. Timestamping17
11. Privacy18
a. Onion Routing18
b. Fixed Identifiers18
12. Specifications and Implementations19
13. Advantages and Criticisms of the Lighting Network20
14. Future State and Current Trends 21
15. Conclusion25
Abstract
Bitcoin protocol can completely change the future of financial
transactions globally and can change the way modern man
looked at electronic transfer of money or currency. It can
eliminate the need for a third party which can hold the funds or
act as an intermediator. All this can be achieved only with the
use of a computer and a broadband connection. But there are
quiet a few roadblocks in achieving this. Bitcoin is associated
with certain problems. It has a scaling problem, where the
number of transactions done per second are very few compared
to other electronic transfer methods present in the modern
world. The other roadblock is Volatility. Bitcoin being a global
electronic currency, where millions of users are dependent on it
for their daily transactions cannot be volatile. This is because of
various external factors driving the users to either use a
Cryptocurrency or not to do it. At the same time there is no
standard that is used too make transfers here. Scalability and
Volatility cause the third problem with Bitcoin. That is
Usability. The number of people actively using Bitcoin for
electronic transfers is always fluctuating. These issues are
answered as a part of “The Lightning Network”, which is an
additional layer that transmits signed transactions by only
utilizing the Bitcoin blockchain for the final transfer of funds.
The associated advantages and disadvantages of this Lightning

network are discussed in relation to how this answer’s the basic
questions raised in regard to Bitcoin and blockchain in general.
Introduction to Block Chain
Blockchain is considered as the most fundamental and most
important aspect of Bitcoin. The blockchain is a distributed
database of records of all transactions or digital event that have
been executed and shared among participating parties which
contains every single record of each transaction. Blockchain
Technology first came to light when a person or Group of
individuals name ‘Satoshi Nakamoto’ published a white paper
on “BitCoin: A peer to peer electronic cash system in 2008.
Blockchain Technology Records Transaction in Digital Ledger
which is distributed over the Network thus making it
incorruptible. Anything of value like Land Assets, Cars, etc. can
be recorded on Blockchain as a Transaction.” (Gupta, 2019)
Bitcoin
What is bitcoin?
Bitcoin (₿) is a type of cryptocurrency. It is a digital currency
that is decentralized and works
Advantages of Using Bitcoin
1. Greater Liquidity Relative to Other Cryptocurrencies
Bitcoin in the most popular cryptocurrency, that has greater
liquidity than its peers. This allows users to retain most of its
inherent value when converting to fiat currencies, such as the
U.S. dollar
2. Increasingly Wide Acceptance as a Payment Method
Most of the merchants accept Bitcoin payments, it’s possible to
buy virtually any physical item serious about reducing your

exposure to fiat currencies.
3. International Transactions Easier Than Regular Currencies
Bitcoin transactions aren’t any international transaction fees or
red tape to navigate, as is often the higher, while money transfer
fees can be as high as 15%.
4. Generally Lower Transaction Fees
Credit cards and Paypal has high transaction fees like 2% - 3%
whereas Bitcoin comes with lower transaction fees.
5. Anonymity and Privacy Relative to Traditional Currencies
Bitcoin’s built-in privacy protections allow users to separate
their Bitcoin accounts from their out who those users really are.
6. Independence from Political Agents and Creators
Bitcoin is also unbeholden to its creators, due to its completely
decentralized nature, popularity, relative to other
cryptocurrencies, negatively impacting other holders.
Disadvantages of Using Bitcoin
1. Exposure to Bitcoin-Specific Scams and Fraud
Bitcoin is one of the most popular currencies in the world. This
caused a lot of frauds that are
2. Black Market Activity May Damage Reputation and
Usefulness
Obviously, dark web marketplaces like Silk Road and Sheep
expose rank-and-file users to fraud and the threat of criminal
prosecution.
3. Susceptible to High Price Volatility
In the wake of the Mt. Gox collapse, Bitcoin’s value fell by
more than 50%. Following the FBI’s times, only to halve in the
first weeks of 2018 – wiping out billions in market value almost
overnight.
4. Environmental Ills of Bitcoin Mining
Bitcoin mining consumes vast amounts of electricity. According
to Business Insider, some of the plants and horrific smog
routinely makes even low-key outdoor activity unsafe for
healthy adults.

Private Keys
Every Bitcoin user has at least one private key (basically, a
password), which is a whole number between 1 and 78 digits in
length. Private keys confirm their owners’ identities and allow
them to
Hashing
“In simple terms, hashing means taking an input string of any
length and giving out an output of a fixed length. In the context
of cryptocurrencies like Bitcoin, the transactions are taken as an
input and run through a hashing algorithm (Bitcoin uses SHA-
256) which gives an output of a fixed length.” (Rosic, 2017)
A common use of this kind of hash function is to store
passwords. When you create a user
“This means that if a hacker is able to access the database
containing the stored hashes, they will not be able to
immediately compromise all user accounts because there is no
easy way to find the password which produced any given hash.”
(Faife, 2017)
Volatility
Volatility is one of the problems with Bitcoin (BTC) along with
most other cryptocurrencies and they fluctuate discouragingly
against dollar. For example, if you take a bitcoin when FOMO
fueled impulse you would bring one hundred us dollar worth of
bitcoin in
Why Bitcoin has a Volatile Value
Bitcoin has no fundamental costs to fall back upon and the price
fluctuations inside the Bitcoin spot fee at the Bitcoin exchanges
is pushed by many factors. Volatility is measured in
conventional markets with the aid of the Volatility Index,
additionally referred to as the CBOE
Unpleasant News Hurts Adoption Rate
News occasions that scare Bitcoin users consist of geopolitical
occasions and statements
All these incidents and the general public panic that ensued

drove the cost of Bitcoins versus fiat currencies down swiftly.
However, Bitcoin-friendly buyers viewed the ones events as
proof that the marketplace became maturing, riding the price of
Bitcoins versus the greenback markedly returned up in the short
period right away following the information events. ( Barker,
2019)
Large Currency Holder Risks
Bitcoin volatility is likewise to a quantity driven through
holders of large proportions of the full top-notch drift of the
foreign money. For Bitcoin traders with modern-day holdings
above
Since Bitcoin’s extent resembles a small cap inventory, the
foreign money has now not hit the mass market adoption rates
that might be necessary to provide alternative value to big
holders of the forex.
Security Breaches
Bitcoin can also become unstable while the Bitcoin community
exposes safety vulnerabilities which will produce massive open
supply responses within the shape of safety fixes. For example,
it has become a hack that drove the Yapian Youbit to financial
smash, whilst
Scalability
The second crucial factor Armstrong believes is crypto mass
adoption is scalability solutions. He started off by way of
saying there are presently 5 to ten groups running on possible
scalability answers. He mentioned that 2d-layer solutions like
the lightning network and next-gen protocols, which he says
will begin to come out over the subsequent 6 to 12 months.
Why Bitcoin has a Scalability Problem
Bitcoin is designed to keep all transactions in a facts structure
referred to as a block. A block carries data approximately the
preceding block, miscellaneous records about mining rewards,
and maximum of the block is just transaction records. Blocks

also are fixed at most of
mins on an average. To continue, that might be over 400
terabytes of information per year. ( Poon & Thaddeus, 2016)
As the wide variety of transactions starts to growth, your
character transaction competes with every different for
inclusion interior a restrained block space, and so, the
probability of getting yours protected inside the block starts off
evolved to lower. Since miners can arbitrarily decide which
transactions to include in a block, on these activities, the only
manner to incentivize the miners to consist of your transaction
is by way of growing your transaction rate. However, this starts
to make transactions prohibitively pricey consisting of this 192-
byte transaction for $92.98 in which the transaction rate
changed into $14.86. (Gilani, 2019)
Usability
As most of the people already aware that, using the
cryptocurrency is not nearly instinctive as it needs to be for
public adoption. In regarding, Armstrong explained that there
are numerous process steps when it comes to buying, selling,
storing and securing the cryptocurrency. He said that retail
investors want something that works in addition to the famous
Chinese app, WeChat. (Wall, 2019)
On the other hand, as formerly pronounced with the aid of IIB,
75% of crypto holders nevertheless worry the failure of sending
transactions even as sending crypto. In order for crypto mass
adoption to occur, managing your crypto has to be as smooth
using a not unusual messaging app. (Wall, 2019)
The Bitcoin Lightning Network explained
The Bitcoin Lightning Network is basically a solution that’s
been marketed as the solution to all problems that are associated
with Bitcoin. There are certain claims done by the Lightning
network like solving the scaling problem,
Lightning Nodes and Channels

A Lightning node operates basically like a Bitcoin node like in
a networked approach, validating all the transactions and
communicating with other nodes. In addition to this, it manages
to do things that Bitcoin nodes couldn’t do, like it can hold
funds, act as an automated financial intermediary, monitor the
Lightning “channels” continuously for any suspicious behavior
and react to the malicious behavior defensively.
Creating a Lightning Channel:
Please find the example transaction considered to explain
creating the Lightning Network. As an example, consider you
and your friend Bob are trying to do a financial transaction. One
way this is done is by Venmo-ing each other. But consider using
Crypto for the same transaction. This can be done by creating a
new channel that is mutual between you and Bob, that can be
funded equally by both the users with half a bitcoin each.
Illustration of two nodes creating a channel on the Bitcoin
Lightning Network
A new Lightning channel is basically like designing a multi-
signature bitcoin wallet that will require signatures from both
the parties involved(You and Bob), but only with a difference
that each one gets a signed, but still not a broadcasted,
“Commitment Transaction”, as per the Lightning Network white
paper, that returns your initial deposits back to you(citation
paper). The advantage with this is that any one of the users can
unilaterally close the channel by broadcasting this transaction
and everyone gets their rightful amounts (Gilani, 2019).
Making Lightning Transactions with People Without Channels:
In this scenario consider another friend say Alice is added to the
transaction. Based on certain spending norms, there comes a
situation where you have to pay Alice but you don’t have a
channel established with Alice.
Illustration of a multi-hop lightning transaction
Assume that Bob has a channel with Alice, this can be used to
pay Alice via Bob. Your node calculates the optimal route

between you and Alice—in this case, with Bob as the financial
intermediary—and the middlemen can all pay money forward,
with a small fee if they choose. (Gilani, 2019)
Closing the Channel:
Instant Payments
Micropayments
Timestamping:
Trusted Timestamping is a secure process to track the creation
of a document or bitcoin and works as a legal validation tool for
a record created in the bitcoin network. In the real world, it acts
similar to a notary that would let anybody validate whether the
records existed at a particular date and time. By default, every
bitcoin transaction holds a timestamp that includes the date and
time and a cryptographic digest can be added to the transaction
to check the data existence at a specific point of time.
In such a way the timestamp serves as a digital validation for
different types of media files, e.g. plain text TXT, Portable
Document Format (PDF), Microsoft Word (DOC, DOCX),
Image (TIFF, JPEG etc), Spreadsheets (XLS, XLSX), Drawings
(CAD) with any kind of content like: Contracts, Photos,
Literature, Drawings, Books, Poetry etc.
The fundamental blocks of timestamp are digital signatures and
hash functions. First step is to calculate the hash function for
the data and then send it to Time Stamp Authority, where the
hashed
Privacy:
Privacy is important in lightning network to secure payments.
Below explained one of the concerns with the current security
and proposed solution for future.
Concern – Fixed Identifiers: Currently the privacy in the
lightning network used fixed identifiers in their payments, i.e.,
an identifier is repeated through entire route. This opens a
chance for an adversary to identify the source of the payment
flow and the entire path if two nodes are known. This can be

improved by adopting Schorr aggregated public keys.
Solution
– Onion Routing:
The lines are channels and circles are
nodes.
Implementations of the Lightning Network Protocol
Below are few implementations of the lightning network
protocol and others are to be added more in future.
· LND - Lightning Network Daemon (Golang)
· eclair - A Scala implementation of the Lightning Network
(Scala)
· lit - Lightning Network node software (Golang)
· c-lightning - A Lightning Network implementation in C
· rust-lightning - A Lightning Network implementation in Rust
[Incomplete]
· lightning-onion - Onion Routed Micropayments for the
Lightning Network (Golang)
· ptarmigan - C++ BOLT-Compliant Lightning Network
Implementation
The Pros and Cons of The Lightning Network:

Pros
The Cons:
Like everything else, the Lightning network is not perfect and
has certain limitations.
The system is primarily designed to handle small to medium
transactions, so it cannot process large payments. Another
important issue is centralization. Some cryptographers believe
that this type of network can actually facilitate centralization at
the payment center level. This process is similar to minor
centralization. Lightning Network does not support offline
payments. The situation is similar for point-to-point
connections. If one of the pairs does not respond, the user must
wait hours until he can recover the money.
Future State and Current Trends:
After years of conception and development, the first Lightning
implementation is currently in beta. Every day more online
nodes appear, and more and more users open channels to each
other. Some merchants now accept Lightning payments. But, of
course, these are the first days of the Lightning network. While
the main implementation is available and some wallets and
other applications are available, the Bitcoin overlay network
will improve in the coming years from network architecture to (
Wirdum, 2018) security and ease of use. use. That is predicted.
( Wirdum, 2018)

Dual-Funded Channels:
The Lightning network consists of several payment channels.
Each payment channel exists between two users and can transfer
money between users. However, at this early stage of
development, payment channels can only be financed by one of
them. The lender must first deal with the counterpart. Only then
can the counterparty return the payment in the same way.
However, the Lightning Network technical document proposed a
dual financing channel. For this purpose, a specification of the
ACINQ company behind Eclair is proposed. As the name
implies, both users can partially finance the payment channel by
depositing their respective bitcoins. This makes the Lightning
user experience more flexible, as users not only receive a
payment immediately after opening a channel but can also send
money. ( Wirdum, 2018)
Submarine Swaps:
Compact Client-Side Block Filtering:
Although Lightning Network is a second level protocol, the
Bitcoin block chain is still relevant to lightning users for
security reasons. In particular, Lightning users should monitor
the block chain to see if it contains a particular transaction.
This may require many resources, especially for mobile users. A
solution for this is called Simplified Payment Verification
(SPV) and is described in the Bitcoin technical document.
Current SPV wallets use a trick called "Bloom Filter" to

determine if an associated transaction has occurred. ( Wirdum,
2018)
Watchtowers:
The current design of the watchtower is not a rock, but it works
that way. Each time a user updates a channel, it sends a small
data packet to the watchtower. The first part of this package is a
transaction index that you can observe as if it were a puzzle.
This trick alone says nothing about the transaction that the
Watchtower needs to know. In this way, users do not give
privacy.
However, if the corresponding transaction appears in Bitcoin
Block chain, the Watchtower can recognize it with a hint. Then,
using the transaction data in the block chain itself, the
watchtower can reconstruct the penalty transaction using the
second part of the received package. This penalty transaction
sends all channel amounts to the trap user. Sanctions can also
be established so that the Watchtower can claim some of the
money as a reward for their work. Users can outsource channel
monitoring to multiple monitoring towers. If one fails, the other
fails, which limits the risks to the Lightning user to almost
negligible levels. ( Wirdum, 2018)
Atomic Multi-Path Payments:

Conclusion:
Lightning Network is touted to be the solution to all the
drawbacks associated with Bitcoin.
With this paper we have clearly outlined Blockchain, Bitcoin
and its drawbacks, Lightning Network being a solution to the
drawbacks of Bitcoin. With instant and free Lightning
payments, Bitcoin can replace credit cards, including cash or
other personal transactions. Lightning Network provides
solutions to Instant Payments, Micropayments and to reduce the
amount of burden that is being put on the blockchain network.
This network uses the Bitcoin scripting opcodes to enable real
Bitcoin transactions, simultaneously providing security against
fraudulent transactions and counterparty theft. According to the
creators of Lightning Network Joseph Poon and Thaddeus Dryja
“If all transactions using Bitcoin were on the blockchain, to
enable 7 billion people to make two transactions per day, it
would require 24GB blocks every ten minutes at best
(presuming 250 bytes per transaction and 144 blocks per day).
But if all transactions using Bitcoin were conducted inside a
network of micropayment channels, to enable 7 billion people to

make two channels per year with unlimited transactions inside
the channel, it would require 133 MB blocks (presuming 500
bytes per transaction and 52560 blocks per year). Current
generation desktop computers will be able to run a full node
with old blocks pruned out on 2TB of storage.” ( Poon &
Thaddeus, 2016).
Thus, the usage of Lightning network can revolutionize the way
web-based transactions are done and the way billions of users
can use this technology to transfer funds without any risk.
References:
Barker, J. T. (2019, July 9). Why Bitcoin Has a Volatile Value.
Retrieved from Investopedia:
https://www.investopedia.com/articles/investing/052014/why-
bitcoins-value-so-volatile.asp
FRANKENFIELD, J. (2019, june 25). Mt. Gox. Retrieved from
Investopedia: https://www.investopedia.com/terms/m/mt-
gox.asp
Poon, J., & Thaddeus, D. (2016). The Bitcoin Lightning
Network:. lightning-network-paper.
Wirdum, A. v. (2018, June 7). The Future of Bitcoin: What
Lightning Could Look Like. Retrieved from Bitcoin Magzine:
https://bitcoinmagazine.com/articles/future-bitcoin-what-

lightning-could-look
Bitcoin. (2019). Retrieved from Bitcoin is an innovative
payment network and a new kind of money:
https://bitcoin.org/en/
Bitcoin, U. t. (2018, July 8). Bitcoin Lighting Network
Explained: Pros and Cons. Retrieved from
https://usethebitcoin.com/bitcoin-lighting-network-explained-
pros-and-cons/
Dryja, T., Gert Jaap, G., & Lovejoy, J. (n.d.). MIT Media Lab.
Retrieved from Digital Currency Initiative:
https://dci.mit.edu/lightning-network
Faife, C. (2017, Feb 19). Bitcoin Hash Functions Explained.
Retrieved from Coindesk: https://www.coindesk.com/bitcoin-
hash-functions-explained
Floyd, D. (2018, March 12). Lightning Network: What Is It and
Can It Solve Bitcoin's Scaling Problem? Retrieved from
Investopedia: https://www.investopedia.com/news/lightning-
network-what-it-and-can-it-solve-bitcoins-scaling-problem/
Gilani, A. S. (2019, April). Scale with Speed: The Bitcoin
Lightning Network Explained. Retrieved from Topal:
https://www.toptal.com/bitcoin/intro-to-bitcoin-lightning-
network
Gupta, A. (2019, Jan). Introduction to Blockchain technology.
Retrieved from geeksforgeeks:
https://www.geeksforgeeks.org/blockchain-technology-

introduction/
Martucci, B. (2019). What Is Bitcoin – History, How It Works,
Pros & Cons. Retrieved from Moneycrashers:
https://www.moneycrashers.com/bitcoin-history-how-it-works-
pros-cons/
Rahouti, M., Xiong, K., & Ghani, N. (2018). Bitcoin
Concepts,Threats and Machine-Learning Security

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