Watchtowers were conceived as a crucial element in the original design of the Lightning Network (LN) described in research papers. Over time, these watchtowers have undergone enhancements and streamlining to support Bitcoin's LN as it aims to expand into a widespread peer-to-peer payment infrastructure.

Essentially, watchtowers form a network of external parties that users enlist to oversee the monitoring of on-chain transactions related to their lightning channels. Acting akin to vigilant watchdogs, these entities maintain surveillance over the blockchain, identifying and penalizing any deceitful actors attempting to cheat other users within channels. Their primary function involves assessing whether a participant within an LN channel has illicitly broadcast a previous channel state—a move that could be exploited to retrieve funds post-channel closure under an invalid state.

For providing their vigilant services, these watchtowers receive compensation from users, who can opt to engage multiple watchtower services to mitigate the risk of failure from a single service provider. Recent advancements like compact client-side filtering, as seen in the Neutrino protocol, have lightened the load on watchtowers to some extent. Nonetheless, their role remains crucial within the LN ecosystem, especially concerning scalability.

Users on the Lightning Network are advised to periodically check on the status of their off-chain channels in correlation with on-chain activities. Here, watchtowers serve as round-the-clock safeguards against security vulnerabilities stemming from invalid channel states, offering users peace of mind even when they are offline. As Bitcoin's LN prioritizes privacy, efforts to curb the ability of these watchtowers to link transactions to specific channels are fundamental, with several innovations directly impacting the network's capability to scale while maintaining user privacy.

Watchtowers operate as independent third-parties that oversee the Bitcoin blockchain continuously on behalf of their clients. They scrutinize discrepancies between on-chain transactions and the closure of off-chain channels in an invalid state. Each off-chain LN channel payment necessitates a valid commitment, establishing the current state of the channel balance. While the mechanism provides essential security, technical challenges and economic factors loom over watchtower operations, requiring careful mitigation measures for sustained efficient functioning.