The: Daniel ⚡️ on Nostr: There’s a new issue of Bitcoin for Bunnies 🥕🐇 out today, where I answer a ...

There’s a new issue of Bitcoin for Bunnies 🥕🐇 out today, where I answer a question from Bryon D Bothun (npub15sf…4ce5) about whether sats on Lightning are more SAFU than sats on exchanges.

Enjoy, and let me know your thoughts!

quoting note14ah…84z9

B4B ISSUE 3 🐰 🕳️: WHOSE CHANNEL IS IT ANYWAY?
by The: Daniel ⚡️ (npub1aeh…4nwx)

This morning, Bryon D Bothun (npub15sf…4ce5) asked the question:
Are sats in a Lightning channel "safer" than sats on an exchange?

The short answer:

Yes, as long as you can verify the ownership of the channel.

The more nuanced answer:

It really depends on who controls the private keys to the underlying UTXO that created the channel, and whether that ownership is fully-transparent.

Custodial wallets use channels on their own nodes to provide you easy access to sats on Lightning without any of the hassles of getting inbound and outbound channel liquidity or running your own node. This necessitates a trust relationship where you do not have direct visibility into how they are managing the sats on your behalf.

There is no way to issue fake bitcoin on the Lightning Network, as nodes cannot open channels without a valid UTXO recognized and confirmed on the blockchain. This, however, does not completely prevent centralized apps or exchanges from internally crediting fake bitcoin to a user’s account and using new customer deposits to pay for outgoing transactions (basically, running a Ponzi scheme). We’ve definitely all seen that before.

Some examples of players in the custodial Lightning space with a solid reputation include: Wallet of Satoshi, Alby, LightningTipBot, Strike, ZBD.

We have also seen a couple of custodial Lightning wallets go offline over the past year. Both the BlueWallet (lndhub.io) and LNTXbot nodes were shut down and users who did not withdraw their funds in time are now unable to do so. This was mainly a response to the rapid expansion of the Lightning Network outpacing the growth of these experimental projects, and the founders chose not to maintain them so as to no longer be responsible for holding ever-increasing amounts of user funds.

Additionally, there are some apps masquerading as Lightning wallets but are built on non-bitcoin blockchains such as one called Bitcoin Libre, which uses wrapped bitcoin on a fork of EOS, so good luck trying to determine if they really hold any sats on your behalf.

In order to use the #zap feature on #nostr, you need to have a Lightning Address or LNURL, which requires both a webserver and a Lightning node to interact. This is still fairly challenging to set up for most people, which is where custodial wallets are a big help for onboarding new users.

As you become more comfortable with sending and receiving sats on the Lightning Network, it’s important to explore different ways to use it, especially in a non-custodial way. If you don’t have the dedication to set up and maintain your own node, there are options including Phoenix, Breez, and Blixt that you can use. In each case, you should read the documentation and learn how they work, so you aren’t surprised by channel opening fees, and you understand how to back up your wallet and recover your funds on-chain in the event of unexpected circumstances.

So, is bitcoin on the Lightning Network safer than bitcoin on an exchange? As long as you take the necessary precautions, understand the risks with using different types of wallets, and take self-custody seriously, your sats in Lightning channels are far more secure than on any exchange.

Ultimately, the responsibility for securing your own sats, whether on-chain or off-chain falls on you. As any old rabbit around these parts will tell you, it’s best to keep the majority of your hodlings in on-chain cold storage, and use Lightning wallets for smaller day-to-day transactions that don’t expose you to significant risk of losing a life-changing amount.

Thanks for your question, Bryon. I started writing a reply to your note and it turned into a full-blown post for B4B. And thanks also to bostonwine (npub14qz…2q26) for tagging me.

Keep burrowing, friends! 🐰🕳️

note1rxd…u6cy