Taproot: Lightning Network Channels

Overview

Taproot enables efficient Lightning Network channels with improved privacy and smaller footprint. Cooperative closes look identical to regular payments, hiding the Lightning channel structure completely.

Key Benefits:

68% smaller cooperative closes vs force closes
Complete privacy when closing cooperatively
Flexible spending paths (cooperative, revocation, delayed claim)
Compatible with existing Lightning Network protocols

Script Tree Structure

Commitment
├── Left: Cooperative close (2-of-2 multisig)
└── Right:
    ├── Left: Revocation path (penalty key)
    └── Right: Delayed claim (timelock + local key)

Transaction Formats

Channel Open Transaction

JSON:

{
  "version": 2,
  "inputs": [
    {
      "prevTxId": "funding_tx_1234567890abcdef1234567890abcdef1234567890abcdef1234567890ab",
      "outputIndex": 0,
      "scriptSig": "483045022100...",
      "sequence": 4294967295
    }
  ],
  "outputs": [
    {
      "satoshis": 10000000,
      "script": "62512102abcdef1234567890abcdef1234567890abcdef1234567890abcdef12345678"
    },
    {
      "satoshis": 5000000,
      "script": "76a914change_address...88ac"
    }
  ],
  "lockTime": 0
}

Channel Capacity: 10,000,000 sats (10 XPI)

Cooperative Close (Key Path)

Best case: Both parties agree to close channel

JSON:

{
  "version": 2,
  "inputs": [
    {
      "prevTxId": "channel_tx_id_1234567890abcdef...",
      "outputIndex": 0,
      "scriptSig": "41a1b2c3d4e5f67890abcdef1234567890abcdef1234567890abcdef1234567890abcdef1234567890abcdef1234567890abcdef1234567890abcdef1234567890ab",
      "sequence": 4294967295
    }
  ],
  "outputs": [
    {
      "satoshis": 6000000,
      "script": "76a914partyA_address...88ac"
    },
    {
      "satoshis": 3990000,
      "script": "76a914partyB_address...88ac"
    }
  ],
  "lockTime": 0
}

Input Script: 65-byte MuSig2 signature (both parties cooperate)

Size: ~110 bytes

Privacy: Complete - looks like regular payment

Force Close (Script Path)

When cooperation fails, reveal commitment transaction

JSON:

{
  "version": 2,
  "inputs": [
    {
      "prevTxId": "channel_tx_id_1234567890abcdef...",
      "outputIndex": 0,
      "scriptSig": "473044022012345678...02201234abcdef...<commitment_script><control_block>",
      "sequence": 4294967295
    }
  ],
  "outputs": [
    {
      "satoshis": 6000000,
      "script": "6351210344a1b2c3...OP_CSV..."
    },
    {
      "satoshis": 3980000,
      "script": "6351210355b1c2d3...OP_CSV..."
    }
  ],
  "lockTime": 0
}

Input Script Breakdown:

ECDSA signature
Commitment transaction script
Control block with merkle proof

Output Scripts: Timelocked (OP_CHECKSEQUENCEVERIFY) for dispute period

Size: ~350 bytes

Privacy: Reveals channel structure

Size Comparison

Close Type	Size	Privacy	Speed
Cooperative (Key Path)	~110 bytes	High	Instant
Force Close (Script Path)	~350 bytes	Low	Delayed

Savings: 68% smaller when cooperating

Implementation Overview

Note: Full Lightning implementation is complex. This shows the Taproot aspects only.

import {
  PrivateKey,
  Script,
  Opcode,
  buildScriptPathTaproot,
  Transaction,
} from 'lotus-sdk'

// Channel participants
const alice = new PrivateKey()
const bob = new PrivateKey()

// Create aggregated key for cooperative close (MuSig2)
const aggregatedKey = createMuSig2Key([alice.publicKey, bob.publicKey])

// Build commitment scripts
const aliceRevocation = alice.publicKey // Penalty key if Alice cheats
const bobRevocation = bob.publicKey // Penalty key if Bob cheats

// Alice's commitment transaction output
const aliceCommitment = new Script()
  .add(144) // ~4.8 hours dispute period
  .add(Opcode.OP_CHECKSEQUENCEVERIFY)
  .add(Opcode.OP_DROP)
  .add(alice.publicKey.toBuffer())
  .add(Opcode.OP_CHECKSIG)

// Bob's commitment transaction output
const bobCommitment = new Script()
  .add(144) // ~4.8 hours dispute period
  .add(Opcode.OP_CHECKSEQUENCEVERIFY)
  .add(Opcode.OP_DROP)
  .add(bob.publicKey.toBuffer())
  .add(Opcode.OP_CHECKSIG)

// Build channel script tree
const channelTree = {
  left: {
    script: buildCooperativeClose(alice.publicKey, bob.publicKey),
  },
  right: {
    left: { script: aliceCommitment },
    right: { script: bobCommitment },
  },
}

const { script: channelScript } = buildScriptPathTaproot(
  aggregatedKey,
  channelTree,
)

console.log('Channel address:', channelScript.toAddress().toString())

Lightning Network Flow

1. Channel Opening

// Alice and Bob agree on channel parameters
const capacity = 10000000 // 10 million sats
const aliceBalance = 10000000
const bobBalance = 0

// Create funding transaction
const fundingTx = new Transaction()
fundingTx.addInput(/* Alice's UTXO */)
fundingTx.addOutput(new Output({ script: channelScript, satoshis: capacity }))
fundingTx.sign(alice)

// Broadcast funding transaction
const channelId = fundingTx.id

2. Making Payments (Off-Chain)

// Update balances off-chain (no blockchain transactions)
let aliceBalance = 10000000
let bobBalance = 0

// Alice pays Bob 1 million sats
aliceBalance -= 1000000
bobBalance += 1000000

// Create new commitment transactions (not broadcast)
// Each party holds the other's signed commitment

3. Cooperative Close

// Final balances: Alice=6M, Bob=4M
const closeTx = new Transaction()

closeTx.addInput(
  new TaprootInput({
    prevTxId: Buffer.from(channelId, 'hex'),
    outputIndex: 0,
    output: new Output({ script: channelScript, satoshis: capacity }),
    script: new Script(),
  }),
)

closeTx.addOutput(new Output({ script: aliceAddress, satoshis: 6000000 }))
closeTx.addOutput(new Output({ script: bobAddress, satoshis: 3990000 }))

// Both parties sign with MuSig2 (key path)
const muSig = createMuSig2Signature([alice, bob], closeTx)
closeTx.applySignature(muSig)

// Broadcast - looks like regular payment!

4. Force Close (If Needed)

// Alice broadcasts her latest commitment transaction
const forceCloseTx = alice.latestCommitmentTx

// Outputs are timelocked - Bob has dispute period to respond
// If Bob detects old commitment, he can use revocation key

// After timeout, Alice can claim her funds

Security Considerations

Dispute Period

// Lotus blocks: ~2 minutes each
const DISPUTE_BLOCKS = 144 // ~4.8 hours

// Too short: Not enough time to detect cheating
const tooShort = 72 // ~2.4 hours (risky)

// Too long: Funds locked unnecessarily after force close
const tooLong = 2160 // ~3 days (inconvenient)

// Recommended: 144 blocks (~4.8 hours)

Revocation Keys

Critical: Never reuse old commitment transactions after revoking them!

// When creating new commitment:
1. Generate new revocation key
2. Exchange revocation keys for previous commitment
3. Now old commitment is "revoked" (penalty if broadcast)

Penalty: If Alice broadcasts revoked commitment, Bob can take ALL channel funds.

Backup Strategy

DO:

✅ Always keep latest commitment transaction
✅ Monitor blockchain for channel closes
✅ Respond to revoked commitments within dispute period
✅ Use watchtowers for 24/7 monitoring

DON'T:

❌ Lose latest commitment (can't force close)
❌ Broadcast old revoked commitment (lose all funds)
❌ Go offline for longer than dispute period
❌ Forget to revoke old commitments

Advantages Over Traditional Channels

Feature	Traditional P2SH	Taproot
Cooperative Close Size	~300 bytes	~110 bytes
Privacy (Cooperative)	Low	High
Privacy (Force Close)	Low	Medium
Script Flexibility	Limited	High

Key Advantage: Cooperative closes are indistinguishable from regular payments

Use Cases

Micropayments

Pay for services with instant, low-fee transactions:

// Open channel with service provider
const serviceChannel = openChannel(user, service, 1000000) // 1M sats = 1 XPI

// Make payments off-chain
await serviceChannel.pay(1000) // Pay 1000 sats
await serviceChannel.pay(5000) // Pay 5000 sats
await serviceChannel.pay(10000) // Pay 10000 sats

// Close cooperatively after use
await serviceChannel.cooperativeClose() // ~110 bytes on-chain

Payment Routing

Route payments through multiple hops:

Alice -> Bob -> Carol -> Dave
  |      |       |       |
10M    10M     10M     10M

Alice can pay Dave without direct channel!

Streaming Payments

Pay per second/minute for streaming content:

// Open channel with streaming service
const streamChannel = openChannel(user, netflix, 10000000) // 10 XPI

// Pay 100 sats per hour of streaming (off-chain)
setInterval(() => {
  streamChannel.pay(100)
}, 3600000) // Every hour

// Close when done watching
streamChannel.cooperativeClose()

Testing

Regtest Example

import { Networks } from 'lotus-sdk'

// Create test channel
const testAlice = new PrivateKey(undefined, Networks.regtest)
const testBob = new PrivateKey(undefined, Networks.regtest)

const testChannel = await openChannel(testAlice, testBob, 1000000, {
  network: Networks.regtest,
})

// Test payments
await testChannel.pay(100000) // Alice -> Bob
await testChannel.pay(-50000) // Bob -> Alice (negative = reverse)

// Test cooperative close
await testChannel.cooperativeClose()

Summary

Benefits:

✅ 68% smaller cooperative closes
✅ Complete privacy when cooperating
✅ Instant off-chain payments
✅ Low fees (only 2 on-chain txs per channel)

Trade-offs:

Requires both parties online for updates
Need to monitor for cheating attempts
Complex state management
Dispute period delay on force close

When to Use:

Frequent payments between parties
Micropayments
Streaming payments
Privacy-sensitive transactions

When NOT to Use:

One-time payments (use single-key)
Parties can't stay online
Don't want state management complexity

Taproot: Lightning Network Channels

Overview

Script Tree Structure

Transaction Formats

Channel Open Transaction

Cooperative Close (Key Path)

Force Close (Script Path)

Size Comparison

Implementation Overview

Lightning Network Flow

1. Channel Opening

2. Making Payments (Off-Chain)

3. Cooperative Close

4. Force Close (If Needed)

Security Considerations

Dispute Period

Revocation Keys

Backup Strategy

Advantages Over Traditional Channels

Use Cases

Micropayments

Payment Routing

Streaming Payments

Testing

Regtest Example

Summary

Related Documentation