With the arrival of Taproot, expected in mid-November of this year, HTLC contracts, which form the backbone of the Lightning network, could improve their privacy. This is thanks to the inclusion of an improved system of cryptographic signatures through PTLCs (an enhanced version of HTLCs) or “time-locked contracts”.
The news has been known among Taproot developers since it began its journey in 2018. However, Bitcoin newsletter portal Bitcoin OpTech, has released a compilation of what this enhancement would mean within the Lightning network and other Bitcoin second-layer protocols such as underwater exchanges. These, currently, are already operational between Bitcoin and Monero, as reported
The improvement is in the system of “secrecy” and release of funds. “Secrecy” is understood as a condition that is kept until the necessary conditions for the release of funds within HTLC contracts have been met. This condition is generated as a hash
number from the cryptographic signatures of the participants.
For example, in the current system the following occurs: John wants to send 1 BTC to Ivan, where Andrea will act as the intermediary node. John will create the transaction, along with a secret. When it reaches Andrea, she will send the funds to Ivan. Ivan, in turn, being the final recipient, will receive the bitcoins, and release the secret. This will then allow Andrea to release the funds that John has sent her.
The schematic shows how 2 spy nodes between router nodes, can intercept and track transactions with HTLC. Source: Bitcoin OpTech.
In this model, which is the one currently in use, the disadvantage is that a single secret is established for the entire transaction. This creates privacy vulnerabilities, as transactions can be tracked by malicious nodes that know the release hash (secret) to use, because in HTLCs there is a single secret for the entire conditional transaction chain.
With the <a href=”https
://bitcoinops.org/en/topics/ptlc/” target=”_blank” rel=”noopener”>PTLC, we propose to create secrets between peers. That is, following the previous example, but using PTLCs, there will be a secret between John and Andrea’s peers, and a different one between Andrea and Ivan.
In this sense, it is possible to create a privacy system between nodes. Since a single node will not be able to trace the possible origin and destination of the funds, since the secrecy is only applicable to a single peer, which may well be the destination of the funds or another routing node.
Another advantage of this model is that, together with Schnorr signatures, it will allow the creation of hashes that will not be distinguishable from any transaction, either from the Lightning network or within the Bitcoin network. This is a substantial advantage, as transaction tracking companies within Bitcoin will not be able to distinguish any kind of difference between the different transactions recorded on the blockchain.