[lambdadmitry]

I was wondering recently, why Bitcoin is even needed for a Lightning-like network? Just settle the channels in cash (or even bank transfers), it won't be any more traceable than Bitcoin. Moreover, there is a successful precedent of such network: https://en.wikipedia.org/wiki/Hawala

Seems like a large enough "overlay network" over cache reserves and bank accounts can be made barely traceable and pretty efficient.

[binarybits]

Lightning's core innovation is the use of the Bitcoin blockchain as a cryptographic backstop for payment channels. If the other party in a payment channel stops cooperating, you can broadcast the current commitment transaction to the blockchain, which effectively refunds the current balance back to each party. There's a similar mechanism for enforcing the hashed time lock contracts that make Lightning payment chains possible. I don't know how you could do anything similar with conventional bank transfers.

[lambdadmitry]

Well, it can be solved the way current banks deal with fraud and chargebacks: rely on a very small number of parties misbehaving and set off a small percentage of money in the system to offset fraud. Another (complementary) way is a reputation system for "nodes" (as is the case in hawala). Both imply some sort of centralization, but so do Lightning incentives (see the discussion around "payment hubs"), so not much difference there.