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On an elements sidechain (e.g. liquid) could you open a lightning channel with a confidential transaction. You could probably open a payment channel but could the channel 'speak' to other channels? Or is lightning network possible on liquid but only in unblinded transactions?

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Short answer: yes.

However that depends on the question if liquid supports segwit and creation of a lightning network. I have not looked at the details of liquid but I believe it does.

The lightning network protocol itself is pretty agnostic to the underlaying blockchain. If you look at the channel announcement messages defined in BOLT7 you will see that every message has the following data fields

[64:node_signature_1]
[64:node_signature_2]
[64:bitcoin_signature_1]
[64:bitcoin_signature_2]
[2:len]
[len:features]
[32:chain_hash]
[8:short_channel_id]
[33:node_id_1]
[33:node_id_2]
[33:bitcoin_key_1]
[33:bitcoin_key_2]

in particular the 32 Byte field [32:chain_hash] is supposed to state the hash of the genesis block (which could be the genesis block of the liquid network). In this way payments can be routed through channels supporting different assets (Bitcoin, litecoin, ...). I don't see any reason why liquid would not be supported.

Actually liquid would make more sense than other assets as 1 LBTC should still be the same value as one BTC. As for varying assets there is an issue pointed out by ZmnSCPxj last december regarding the problem with switching the asset during the routing process.

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    If amount is hidden in a confidential transaction, how would one discover channel capacity, which is not sent in a channel_announcement? – Mark H Feb 17 at 12:49
  • 4
    Liquid indeed support segwit transactions (being based on Elements, Blockstream's experimental platform, which was used to test and design the segregated witness proposal before porting it to Bitcoin), so there is no problem in that regard. The amount is indeed a more difficult issue. Of course you could selectively unblind the funding transaction in order to prove to others in the gossip that you have a given capacity in the channel, but then why use CT in the first place? That being said it would still be sensible for unannounced channels. – cdecker Feb 17 at 14:33

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