I have been, and continue to be an outspoken critic of BTC and its Lightning Network (LN) roadmap. In this article I will explain why I'm opposed to it, hopefully more clearly than ever before.

Why Criticize At All?

I can understand how some would assume my intention is to paint BTC in a negative light, given that I'm a BCH supporter. But actually, I was already writing about the perils of the Lightning Network roadmap before BCH even existed. The real reason I dislike this roadmap is that I believe it doesn't serve or empower humanity.

Bitcoin (the Peer to Peer Electronic Cash System that Satoshi Nakamoto described in his whitepaper) does empower humanity because it's fully peer to peer with no trusted third parties. That system exists today in BCH.

Some believe the Lightning Network helps Bitcoin to scale... that it adds to, and enhances Bitcoin. But in my analysis, when it's used as a substitute for on-chain scaling, it severely compromises and jeopardizes the cherished attributes of decentralization, permissionlessness, and censorship-resistance.

Large, Centralized Hubs Are Already Here

My criticism can be boiled down to 2 points:

1. LN will require big centralized hubs to scale 2. Large hubs enable economic censorship

The first point is already proven. Not just mathematically , but empirically. Just look at the actual network today https://i.imgur.com/qaYhzmW.png

Not surprisingly, BTC supporters aren't denying the first point any longer. But it is revealing to note how those (like me) that predicted this were attacked and ridiculed with all kinds of nonsense arguments and non-sequiturs.

For them to now admit the existence of centralized hubs (but dismiss it as irrelevant) is a textbook example of "moving the goalposts".

Why Isn't the Lightning Network Permissionless?

The first argument you will hear from defenders of Lightning is that it doesn't matter if there are large hubs, because if one refuses to route your payment, you can just use another hub.

Sounds good, except for the fact that you can't "just use another".

You see, there is a huge difference between large hubs and large mining pools. If a mining pool refuses to include your transaction in a block, another pool will. In the case of hubs, you can only be serviced by the hubs you have an open channel with, and since your money can't be in more than one place at a time, your money will be divided up to the extent you have channels open with multiple hubs.

...and you can't simply move your money from one channel to another because that requires an on-chain transaction.

But, Future Banking Will Be Anonymous!

BTC maximalists envision a rosy future where, yes there might be some large centralized entities like banks operating hubs, but there will also be plenty of "less official" or smaller hubs that will be happy to route your payment.

An example of this viewpoint was expressed by economist and author Saifedean Ammous, speaking at a Bitcoin meetup in Munich . He says that in the future we can "Just go to a bank that doesn't tell anybody what to do. Go to a bank that doesn't collect your information."

This raises some eyebrows. I think Chris Pacia (developer of Open Bazaar) said it best in a reddit comment:

'I don't know what makes him think that "anonymity will be trivial to implement at the bank layer". In the next sentence he acknowledges that banks don't operate like this right now but then says "we'll see this more and more with Bitcoin". Why? Are regulations going to magically disappear because ... bitcoin? I've actually talked to bitcoiners who think this will actually be the case. That people will run illegal underground banks just like silk road to facilitate people's payments. This seems delusional to me.'

Those With The Most Coins Will Control the Hubs

The more Bitcoins you are able to put into channels, the more routing capabilities you can provide for others. Thus, liquidity is paramount. Recently, someone objected to my concerns with the argument that the Lightning Network is in the hands of the users. Only those with Bitcoins can decide its fate.

Let's consider this. Who has the most coins? I'll tell you who: Coinbase, Bitpay, Kraken, Bitfinex, and a handful of other big exchanges. Not only do they have the most coins, they have the experience in the space and all the resources to do it. It would be a natural path for them to take.

Obviously they are going to follow all the regulations and laws as they do currently.

What About Anonymous Onion Routing?

Lightning has "onion routing" just like the TOR network. The lightning onion repository proudly proclaims: "In line with Bitcoin's spirit of decentralization and censorship resistance, we employ an onion routing scheme within the Lightning protocol to prevent the ability of participants on the network to easily censor payments"

How much of that "spirit" translates into actual censorship resistance has been questioned here and even here on r/bitcoin .

More fundamentally, there is nothing that prevents the industry from changing the routing protocol, adding in personal identifiers to comply with future regulation.

In fact, the base protocol layer includes "feature flags" meant to extend or change the protocol.

"This semantic allows both future incompatible changes and future backward compatible changes. Bits should generally be assigned in pairs, in order that optional features may later become compulsory. Nodes wait for receipt of the other's features to simplify error diagnosis when features are incompatible."

That's right, it explicitly states in its own documentation that lightning hubs can start introducing "features" that may begin as optional, and later become compulsory. And this can be done without blockchain consensus or changes to the underlying Bitcoin protocol.

The Chain Anchor Nightmare

An evil scheme to take away privacy from Bitcoin users was revealed in a paper entitled "MIT ChainAnchor - Bribing Miners to Regulate Bitcoin". In a nutshell, it works like this: First create an opt-in system where users can link their address to a real world identity, forming a "permissioned group". Then, once the group is big enough, bribe miners only to mine blocks with permissioned transactions.

Sounds terrible? Yes, it would be if it came to fruition. My hope would be that if a scheme were ever attempted, many users and miners would resist, preventing it from achieving the critical mass needed to capture Bitcoin.

If this kind of thing scares you, then the Lightning Network should make you terrified, since the system would be more easily captured using second layers.

Let's break this down further:

Suppose a third of the miners requested personal info in order to mine your transaction. Regardless of how many users complied, 100% of users' transactions would still be mined (they would just be about 33% slower).

On the other hand, if a third of the large, well connected hubs stopped routing payments, many intended transactions would possibly be unable to be routed. Or maybe there would still be some routes available but they would be more expensive and over time, users would be squeezed out (or squeezed in).

Back to Basics: Proof of Work

You might say that it doesn't matter because in Bitcoin, a malicious actor who managed to take control of 51% of the hash power could do whatever they wanted anyway.

But forcing a Bitcoin protocol change by getting 51% of the hashpower is much more difficult than incrementally introducing regulations that Lightning hubs would need to follow.

Bitcoin stays decentralized through its proof of work system, and one important difference between Bitcoin and the Lightning Network is that in Bitcoin, pools are collections of hash power from independent miners.

Although in practice it is true that miners have often deferred to the pool operators to make decisions, at least there is the possibility that hash providers can switch pools if they do not agree with the protocol voting decisions of their current pool.

There is no such analogue in LN. A hub is a hub. It alone decides which payments it will route.

The Rules of the Ledger

If a group of people don't like the consensus rules, they can choose to fork the protocol but continue the ledger under a different set of rules.

That's exactly what happened with Bitcoin Cash.

We did not agree with SegWit and small blocks. Instead, we wanted no Segwit and large blocks. Rather than starting over from scratch with a new ledger, we just continued the existing ledger from the forking block.

This is one of the many beautiful things about Bitcoin. If the protocol starts heading in a bad direction, we can change it. However, it's important to nip these things in the bud. As we have learned over the past year, overcoming the network effect of a currency is a huge mountain to climb. It would be a tragedy for BTC to become widespread, only for it to then be subverted on its second layer (which is what is likely to happen). That's why it's so important to spread awareness of the situation now.

The Risks Are Not Worth It

Is it possible that despite all these concerns,Lightning could end up working just fine and nothing bad ever happens?

Sure, I'll admit it's possible.

But a lot of things are possible.

Given the attack vectors that I've discussed in the 2 layer model, and considering the incentives that powerful interests have to control Bitcoin, is that really a risk you want to take?

For me, the answer is a definite "Hell, no."