A degree of monitoring is possible with Lightning since individual nodes can record the channel and direction information from transactions they are asked to process.
While this method of surveillance has limitations, it still represents a privacy concern.
4b/ Liquid’s protocol is designed so that the amount of funds and type of asset transferred are not revealed to anyone other than the sender and recipient.
This is made possible by a cutting-edge cryptographic protocol developed by @Blockstream called Confidential Transactions.
Generally, Lightning users must hold their keys online until a channel is closed.
Although hacks are not known to have happened to date, when nodes are online it is theoretically possible for attackers to steal sensitive information and even private keys.
5b/ With Liquid, keys can be held offline in cold storage, making it impossible for funds to be stolen w/o physical access to the private keys.
Through Blockstream Green, Liquid users can also take advantage of a hardware wallet, keeping L-BTC private keys permanently offline.
6a/ Trust Model
The Lightning Network allows for transactions to be secured by the Bitcoin network without being directly broadcast to it.
As long as both parties are regularly monitoring the channel state (via a node or wallet), this makes Lightning highly trust-minimised.
6b/ Liquid’s trust model is based on a federation consisting of 15 hardware security modules.
Whilst some trust is required, the distributed model is significantly superior to the trust model that most traders are exposed to, whereby funds are entrusted to a single exchange.
7b/ The Lightning Network provides an excellent means for making small transactions quickly and cheaply, where the very high levels of security provided by on-chain transactions is not required.
Typically, this will be in applications such as retail and gaming.
7c/ Liquid allows for medium to large Bitcoin transactions to be undertaken with a high degree of confidentiality and security, and a reasonable degree of speed.
This makes it suited to trading and lending applications.
8/ The table below shows a summary of the key differences between Lightning & Liquid.
For users wanting to take advantage of the unique properties of both Liquid and Lightning it is possible to build Lightning networks on Liquid, which will allow the sidechain to scale further.