Lightning Network (LN) is the proposed scaling solution for Bitcoin without major compromises on security, namely self custody. Aside from massively expediting transaction speed and cost, LN is also said to be an anonymous payment network because it removes transactions from the Blockchain . This is great, because it fixes the two greatest pain points of Bitcoin: portability and fungibility. It puts Bitcoin on the path to become an anonymous, instant and free e-cash; the holy grail of cypherpunks: an ideal money.
If this would truly be the case we would not need to offer this grant, but unfortunately reality is more nuanced than this. Although there are things to be said about long term portability aspects of LN, much more work needs to be done on its privacy properties as was highlighted by numerous research papers [1, 2, 3, 4, 5, 6].
Grant Design & Schedule:
1.11 BTC will be distributed in total during MAGIC Grants 2 Lightning Network Privacy Research Grants (0.555 BTC each). This grant is made possible by pledges from zkSNACKs Ltd. (Wasabi Wallet; 1 BTC), Dan Gershony (0.1 BTC), and the Wasabi Wallet crew (0.01 BTC).
We’re looking for researchers and teams of researchers to design, (not implement), the best possible privacy-focused Lightning Network light client. The scope of research is narrowed by the assumptions explained later in this article. Applicants may apply with a team or individually. Selected individuals will be formed into another research team.
Researchers are encouraged to apply by March 14th, 2022. The Lightning Network Privacy Committee will then select the researchers by March 31st, 2022. Research teams will have until the end of the year to submit their research papers.
Both teams will receive 20% of the grant value (0.111 BTC each) up-front and 80% (0.444 BTC each) after the research paper has been reviewed and accepted by the committee.
In your application, you don’t have to write your own or your team’s ideas because that task is for the research period. We want to hear about your exploration plans, experience and credentials instead. If you are interested, send your application to LNGrant@magicgrants.org by March 14th, 2022.
Narrowing The Research Space
We are not going to give an overview of Lightning Network privacy. Rather, we will describe already existing solutions, narrowing down the problem space for the researchers.
We’re building software for the future and not for the past. Therefore, we should assume certain technological advancements. For example, we can assume that in the future, computers will rarely be turned off (always on) and everyone will have a reliable and unlimited Internet connection (always online).
Network And Blockchain Level Privacy
Let’s start with an ideal on-chain privacy setup. We assume Tor  for communication (notably for transaction broadcasting), full nodes or client side filtering for acquiring wallet state  and WabiSabi  CoinJoins to fix on-chain privacy issues. This is so far the setup for Wasabi Wallet 2.0 . Furthermore, we’ll also assume Taproot  utilization so LN operations won’t be immediately noticeable on the blockchain.
Although we could assume LN operations with coinjoins and indeed that’s possible with Wasabi 2.0, we won’t because we’ll solely focus on privacy and the assumption that LN operations happen before and after coinjoins will suffice. LN operations inside coinjoins are efficiency improvements.
Finally we can also omit talking about trivial things like how to use Tor circuits properly, not sending unnecessary information to trusted third parties and why not use LN node ID, an alias that is leaking information about your setup or your real world identity. Privacy developers eat such problems for breakfast, assuming they aren’t doing intermittent fasting of course.
-  How Does the Lightning Network Affect Users Privacy?
-  An Empirical Analysis of Privacy in the Lightning Network
-  A Quantitative Analysis of Security, Anonymity and Scalability for the Lightning Network
-  A Cryptoeconomic Traffic Analysis of Bitcoin’s Lightning Network
-  Security and Privacy of Lightning Network Payments with Uncertain Channel Balances
-  Security and Privacy of the Lightning Network
-  Privacy Guarantees of the Bitcoin Lightning Network
-  Tor Project
-  Network Level Privacy
-  WabiSabi
-  Wasabi Wallet 2.0 In The Finish Line — Introduction & Demo By The Lead Developers
-  Privacy and Scale — Everything you need to know about Bitcoin’s Taproot