● Watchtowers for eltoo payment channels: eltoo is a proposed alternative payment channel layer for LN that doesn’t require participants be able to generate penalty transactions. Watchtowers are services that broadcast a pre-programmed transaction if they detect that one of their client’s channels is being closed using an older state; this allows their clients to go offline without risking a loss of funds.

Conner Fromknecht started a thread asking what data watchtowers would need to store for eltoo and how that would affect the scalability of watchtowers or the privacy of their clients. One option would be for a watchtower to store only the latest update transaction. This is highly scalabale because it only requires a constant amount of storage per channel, and it’s secure because only the final settlement transaction can spend from the final update transaction. The offline node can broadcast the settlement transaction whenever it next comes online, even if that is months or years later.

An alternative mechanism discussed would be for the watchtower to also store the settlement transaction. This could provide additional safety in case the node lost all data while it was offline by sending funds to the node’s desired withdrawal address (such as an address in its cold wallet). However, it would increase the storage requirements for watchtowers and, worse, the obvious way to implement it would significantly reduce user privacy by giving watchtowers enough data to learn details about previous payments made in the user’s payment channels. Some participants in the thread discussed ways to obtain the safety benefits while mitigating the privacy loss, although no clear conclusion was reached in the thread as of this writing.