The Lightning Exchange

Introduction

LGO has been dedicated to resolving two major crypto exchange issues:

1. Transparency
2. Crypto funds security

Our whitepaper extensively details our solutions for improving transparency. In the following article we will discuss security issues not mentioned in our whitepaper due to the necessity for research and testing at the time of its writing. Our team can now provide a blueprint of LGO’s vision for security improvement.

The major security issue with crypto exchanges lies in the fact that these exchanges work two different jobs at once: Custody and Exchange.
We intend to separate these two activities. The exchange will exclusively retain in escrow funds placed in orders.
This wasn’t previously possible mainly due to slow and pricey transactions. However there is a solution to these issues: Lightning Network.
In this article we will describe how Lightning Network can resolve major exchange issues and enable users to maintain control over funds that aren’t placed in orders.

Lightning Network presentation

“Lightning’s fundamental technology is a local two ­party consensus, known as a payment channel. Two parties send an initial amount of Bitcoin into a multisignature transaction with a local consensus on the current balance allocated between the two participants. Updates to the allocation of the current balance can be made only with the cooperation of both parties, using a new transaction which spends from the funds allocated to the multisignature transaction to each party.”

In other words, Lightning (LN) allows two people exchanging money to agree on each other’s respective balances off-chain while retaining control over signed transactions, enabling balances to become effective on-chain.

The Lightning Network (LN) as specified in its current version helps solve two limitations of the Bitcoin Network:

• Instant transaction as opposed to waiting for at least one confirmation (six confirmation are recommended)
• Lower fee because fees are collected by LN nodes and not miners as with the Bitcoin Network

These two advantages of LN can reduce dramatically the need for exchange to control user’s money. Users can send their BTC to the exchange when making an order and remove the need for a BTC account in the exchange itself.

Lightning Network limitations

The current LN specification limits the amount of BTC that can be sent to the exchange, slightly more than 42000 bits (previously called µBTC) per transaction and a little more than 167000 bits in a LN wallet. However, this limitation can be lifted for transactions between the exchange and its customer only, by using a custom version of LN.

Currently there are two limits to LN transaction:

1. The maximum amount a LN wallet can contain: 2²⁴-1 satoshis (0.16777215 BTC).
2. The maximum amount of a LN transaction: 2³²-1 milli-satoshis (0.04294967295 BTC).

In fact, in the LN specifications, Bob’s LN wallet is a channel between Bob’s LN node and any other node in the LN network. So the wallet amount limit is the maximum amount that can be put in a LN channel between two LN nodes.

In order to lift these limits, the exchange and its user can run modified LN nodes, that are not connected to the rest of LN network, and:

• Use 5 byte (out of a maximum of 8 bytes) instead of 3 bytes for the funding_satoshis field when creating a channel. With this modification, the maximum amount a LN wallet can contain is raised to more than 10000 BTC
• Use the full 64 bits of the amount_msat when making a transaction.

In these modified nodes, a special bitfield will be set when creating a channel.

Trading workflow using LN

• Alice (Bob and Carol) has (have) an amount of m_a (m_b and m_c) BTC in her btc wallet
• Alice (Bob and Carol) makes a regular BTC transaction of n_a BTC (n_b and n_c) where n_a < m_a to her LN wallet
• Alice wants to buy USD for a value of p_a BTC where p_a < n_a, she makes an order in the form of a LN payment of p_a BTC to LGO.
• Bob wants to buy bitcoins for a value of p_b BTC where p_b < p_a. He creates a USD order in LGO.
• LGO trading engine finds a match between these two orders and makes the trade.
• LGO deducts the right amount of USD from Bob’s USD account
• LGO sends p_b BTC to Bob’s LN wallet. Now his LN wallet contains n_b + p_b BTC
• LGO adds the USD amount corresponding to p_b BTC to Alice’s USD account held by LGO.
• Bob can decide to transfer part of his LN wallet (containing n_b + p_b BTC) to his BTC wallet using a regular BTC transaction.

Conclusion

Through Lightning Network, LGO is able to considerably limit theft risk. Indeed, by separating the activity of custody, the volume of funds kept by an exchange is drastically diminished. If the Exchange is attacked, client funds are not at risk.
Combined with our front-running proof algorithm, LGO solves two major issues that plague cryptocurrency exchanges: transparency and security. By resolving these two significant problems, LGO offers the community more than an essential tool, it testifies as proof that opacity, insecurity and distrust are not inevitable consequences to crypto/fiat exchanges.
The Blockchain offers simple solutions to attain equivalent levels of transparency and security as with a completely decentralized exchange that doesn’t support fiat or cross-chain. We believe all centralized exchanges will eventually use these tools because there will be no longevity without trust.

About LGO

LGO (https://lgo.exchange) is a demonstrably fair, bank-backed premium exchange for institutional investors. It incorporates a decentralized ledger within its proprietary centralized platform in order to guarantee the inalterability, temporality and transparency of the order book and ensure a fair trading environment.

Public Sale starts February 1st !

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