The Lightning Network, a payment channel network with a market cap of over 192M USD, is designed to resolve Bitcoin's scalability issues through fast off-chain transactions. There are multiple Lightning Network client implementations, all of which conform to the same textual specifications known as BOLTs. Several vulnerabilities have been manually discovered, but to-date there have been few works systematically analyzing the security of the Lightning Network.

In PCNs, nodes that forward payments between a source and a receiver are paid a small fee if the payment is successful. The fee is a compensation for temporarily committing funds to the payment. However, payments may fail due to insufficient funds or attacks, often after considerable delays of up to several days, leaving a node without compensation. Furthermore, attackers can intentionally cause failed payments, e.g., to infer private information (like channel balances), without any cost in fees. In this paper, we first use extensive form games to formally characterize the conditions that lead to rational intermediaries refusing (or agreeing) to forward payments. An intermediary’s decision to forward or not depends on the probability of failure, which they approximate based on past experience. We then propose and analyze an alternative fee model that allows the sender to determine and pay a fraction of the fee to intermediaries in a non-refundable manner. A rational sender chooses the fraction such that the intermediaries’ utility for forwarding the payment exceeds their utility for not forwarding. Our simulation study, based on real-world Lightning snapshots, confirms that our novel mechanism can increase the probability of successful payments by 12% and decrease routing fees for senders by about 6% if all nodes behave rationally. Furthermore, previously cost-free probing attacks now require that the attacker pays 1500 satoshis for every 1 million satoshis inferred.

Payment channel networks (PCNs) enhance the scalability of block-chains by allowing parties to conduct transactions off-chain, i.e, without broadcasting every transaction to all blockchain participants. To conduct transactions, a sender and a receiver can either establish a direct payment channel with a funding blockchain transaction or leverage existing channels in a multi-hop payment. The security of PCNs usually relies on the synchrony of the underlying blockchain, i.e., evidence of misbehavior needs to be published on the blockchain within a time limit. Alternative payment channel proposals that do not require blockchain synchrony rely on quorum certificates and use a committee to register the transactions of a channel. However, these proposals do not support multi-hop payments, a limitation we aim to overcome.

Lightning, the prevailing solution to Bitcoin’s scalability issue, uses onion routing to hide senders and recipients of payments. Yet, the path between the sender and the recipient along which payments are routed is selected such that it is short, cost efficient, and fast. The low degree of randomness in the path selection entails that anonymity sets are small. However, quantifying the anonymity provided by Lightning is challenging due to the existence of multiple implementations that differ with regard to the path selection algorithm and exist in parallel within the network. In this paper, we propose a general method allowing a local internal attacker to determine sender and recipient anonymity sets. Based on an in-depth code review of three Lightning implementations, we analyze how an adversary can predict the sender and the recipient of a multi-hop transaction. Our simulations indicate that only one adversarial node on a payment path uniquely identifies at least one of sender and recipient for around 70% of the transactions observed by the adversary. Moreover, multiple colluding attackers can almost always identify sender and receiver uniquely.