Watchtower

A Watchtower acts as a delegated monitor, allowing users to go offline while it continuously scans the blockchain for breach attempts. It watches for a counterparty publishing an old, revoked state of a payment channel to steal funds. This solves the "always online" problem inherent to payment channels, where users must be constantly vigilant to defend their capital.

Upon detecting a fraudulent channel closure, the Watchtower's core function is to automatically broadcast a justice transaction. This is a pre-signed transaction, provided by the user during setup, that punishes the cheating counterparty by allowing the victim to claim the cheater's entire channel balance. This action must be performed within a dispute period (e.g., 144 blocks) to be effective.

To perform its duty, a Watchtower must store critical data provided by the user:

• Revocation secrets to construct the justice transaction.
• Encrypted penalty transactions.
• Channel identifiers. Privacy is maintained through blinded tower protocols, where the tower cannot link the data to the user's public identity. The data is typically stored only for the duration of the channel's dispute period.

Watchtowers operate under different trust and incentive models:

• Altruistic/Integrated: Run by wallet or node software providers as a free service (e.g., LND's wtclient).
• Commercial: Independent services that charge a fee, often a percentage of the protected amount or a success fee from the penalized funds.
• Personal: Users run their own watchtower software, eliminating third-party trust but requiring their own infrastructure.

The Lightning Network's BOLT 13 specification standardizes the Watchtower protocol. Key technical components include:

• Session Negotiation: Establishing an encrypted, time-bound relationship between client and tower.
• State Updates: Clients send encrypted justice transactions and revocation hashes to the tower for each channel state update.
• Tower Discovery: Mechanisms for clients to find and select available watchtowers on the network.

While critical for security, watchtowers have inherent constraints:

• Cannot prevent theft, only punish it after the fact.
• Require upfront setup before a fraudulent state can be published.
• Introduce a trust assumption in third-party towers (excluding personal setups).
• Add complexity and overhead to the channel management process for both users and service providers.

A Watchtower's primary role is to autonomously monitor the blockchain and submit fraud proofs if it detects invalid state transitions. This is essential for optimistic rollups like Arbitrum and Optimism, where transactions are assumed valid unless challenged. The watchtower acts on behalf of users who may be offline, ensuring the network's security assumptions hold.

• Process: Constantly verifies state roots published to Layer 1 against its own computation.
• Action: If a discrepancy is found, it submits a cryptographic proof to the rollup's verification contract.
• Result: The fraudulent state update is reverted, protecting user funds.

In Lightning Network and similar payment channel systems, watchtowers protect a user's funds if their counterparty attempts to broadcast an old, favorable state. Since channels are off-chain, users must be online to challenge fraud. A watchtower solves this by:

• Monitoring the blockchain for old commitment transactions.
• Broadcasting the latest justice transaction (penalty transaction) on the user's behalf.
• Ensuring the cheating counterparty loses their funds as a penalty.

This service allows users to safely go offline without risking their channel balance.

Arbitrum's architecture incorporates watchtower logic within its validator nodes. Any party can run a validator to monitor the chain's ArbOS state. While the system is "optimistic," validators are incentivized to find and prove fraud to earn a portion of the offending validator's stake that is slashed. This creates a decentralized network of watchtowers ensuring the rollup's correctness without requiring every user to run a node.

The Lightning Network has a dedicated watchtower protocol (BOLT 13). Services like Lightning Labs' Faraday or standalone watchtower servers allow users to outsource their monitoring. The user shares encrypted penalty transactions (justice transactions) with the watchtower. The watchtower only needs the breaching transaction's signature to act, preserving privacy. This creates a market for watchtower services, enhancing the network's overall security.

Watchtowers require a sustainable economic model. Common approaches include:

• Service Fees: Users pay a small fee (often a percentage of protected funds) for the monitoring service.
• Bounty Rewards: In rollups, watchtowers earn a slash reward—a portion of the penalized validator's stake—for successfully proving fraud.
• Staking: Some designs require watchtowers to stake collateral, which can be slashed for malicious behavior (e.g., false accusations).

These incentives ensure watchtowers are both profitable to run and trustworthy.

Building effective watchtowers involves navigating key technical challenges:

• Data Availability: The watchtower must have access to all necessary data to verify state, a core concern in validium or certain rollup designs.
• Privacy: In payment channels, designing protocols that allow watchtowers to act without learning channel details is complex.
• Liveness & Decentralization: Reliance on a few centralized watchtowers creates a liveness vulnerability. The goal is a robust, decentralized network of watchtowers.
• Cost: Submitting fraud proofs incurs gas fees; the economic model must account for this.

A Watchtower's primary function is to act as a delegated surveillance agent. It constantly scans the blockchain for breach attempts, such as a counterparty broadcasting an old, revoked state. If detected, the watchtower can submit a justice transaction to penalize the malicious party and return funds to the victim. This allows users to go offline without forfeiting their channel security.

Using a watchtower shifts the security model from trustless to a trust-minimized or incentive-aligned one. Key models include:

• Altruistic/Reputational: Run by entities (like node operators) to support the network.
• Paid Service: Users pay a fee for the monitoring service.
• Stake-based: Watchtowers post collateral that is slashed if they fail to act. The watchtower must be trusted to be online and to act honestly upon seeing fraud.

To monitor effectively, a watchtower must be given encrypted information about potential breach remedy transactions (justice transactions). This data can reveal the structure of a user's channels and their public keys. While the encryption (like client-side encryption) prevents immediate spending, it creates a privacy vector. A compromised or malicious watchtower could analyze this data to map a user's transaction graph.

Watchtower security is contingent on its liveness—it must be online when a breach occurs. If the watchtower is offline, suffers an outage, or is censored from the network (e.g., via network-level filtering), the justice transaction cannot be broadcast. This creates a single point of failure. Mitigations include using multiple watchtowers (redundancy) and ensuring they are run by diverse, geographically distributed operators.

Flaws in the watchtower's software or the underlying protocol can negate its protection. Risks include:

• Buggy Justice Transactions: Incorrectly constructed penalty transactions that fail.
• State Exhaustion: If a watchtower's stored state for a channel is purged (e.g., after a timeout), future breaches cannot be punished.
• Protocol Upgrades: Changes to the base layer (e.g., Bitcoin) or Lightning Network could invalidate pre-signed justice transactions, requiring watchtower software updates.

Watchtower services are vulnerable to economic denial-of-service attacks, where an attacker spams the network with fake channel states to overwhelm the watchtower's storage and bandwidth. A Sybil attack involves creating many low-stake or fake watchtowers to erode user trust in the service ecosystem. Robust watchtower designs incorporate proof-of-work for data submission or staking requirements to increase attack costs.