Watchtowers are essentially an ecosystem of third-parties that users employ to outsource monitoring of on-chain transactions relevant to their lightning channels.
Watchtowers effectively act as ‘watchdogs’ of the blockchain to identify and penalize malicious actors for cheating other users within channels. They evaluate whether or not a participant in an LN channel has improperly broadcast a prior channel state, which could be used to reclaim funds after closing the channel with an invalid state.
For their services, they receive fees from users, and several monetization methods could be deployed. Users can even outsource channel monitoring to multiple watchtower services in case one fails.
Recent developments like compact-client side filtering — used in the Neutrino protocol — reduce the overall burden that watchtowers need to take on, but they provide a crucial role in the LN environment — particularly with scaling.
Prudent LN users need to check-in on the status of their off-chain channels correlating to on-chain activity every once in a while, and watchtowers provide a 24/7 hedge against security risks posed by invalid channel states.
Bitcoin’s LN takes a privacy-oriented approach, so mitigating the ability of watchtowers to link transactions to specific channels is vital, and several innovations have a direct effect on the mesh network’s ability to scale and maintain privacy.
How Watchtowers Work
Watchtowers are third-parties that monitor the Bitcoin blockchain 24/7 on behalf of their clients.
They look for discrepancies between on-chain transactions and closing off-chain channels with invalid states. Every off-chain LN channel payment requires a valid commitment that creates a current state of the channel balance. The state can be updated by either party in a…