Hackathon challenge: Lightning Network Trade Protocol

[HenrikJannsen]

There have been two main concepts proposed for designing a Fiat-to-Lightning trade protocol for Bisq:

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1. Bisq Lightning Trade Protocol

This protocol involves a sequence of three trades and two distinct protocols:

• Step 1: The traders swap their Lightning Bitcoin (BTC) to Liquid Bitcoin (L-BTC) using a reverse Submarine swap (i.e., a swap between Lightning and Liquid). This swap occurs with any available liquidity provider on the Bisq Submarine Swap market—not directly with the trading peer.

• Step 2: The actual fiat-to-crypto trade is executed on the Liquid network using the Bisq MuSig-based protocol (adapted for Liquid).

• Step 3: The L-BTC is swapped back to Lightning BTC through another Submarine swap with a different liquidity provider.

More details can be found in Bisq Proposal #427.

This approach is currently the leading candidate for implementation. The advantage is that it reuses existing protocols without introducing fundamental new challenges. The main hurdle lies in engineering effort and infrastructure requirements—specifically, integration of Liquid wallets and ensuring sufficient Submarine swap liquidity.

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2. Two-Party Lightning Trade Protocol with Threshold Escrow

This concept developed by @stejbac explores the use of advanced cryptographic primitives to facilitate trades directly over the Lightning Network.

More details can be found in Bisq Proposal #416.

Key challenges with this approach include:

• Use of hold invoices, which lock up channel liquidity and may introduce scalability or reliability issues when used at scale.
• Requirement for an escrow entity, which raises concerns around legal and regulatory exposure.

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Open Question

Are there other viable options—perhaps leveraging more recent innovations, such as Taproot Assets over Lightning—that could support a fiat-to-LN trade protocol while preserving Bisq’s core values of decentralization and censorship resistance?

Can the Two-Party Lightning Trade Protocol with Threshold Escrow model be further improved to avoid the stated issues?