Fundamental Properties of the Layer Below a Payment Channel Network

Abstract

Payment channel networks are a highly discussed approach for improving scalability of cryptocurrencies such as Bitcoin. As they allow processing transactions off-chain, payment channel networks are referred to as second layer technology, while the blockchain is the first layer. We uncouple payment channel networks from blockchains and look at them as first-class citizens. This brings up the question what model payment channel networks require as first layer. In response, we formalize a model (called RFL model) for a first layer below a payment channel network. While transactions are globally made available by a blockchain, the RFL model only provides the reduced property that a transaction is delivered to the users being affected by a transaction. We show that the reduced model's properties still suffice to implement payment channels. By showing that the RFL model can not only be instantiated by the Bitcoin blockchain but also by trusted third parties like banks, we show that the reduction widens the design space for the first layer. Further, we show that the stronger property provided by blockchains allows for optimizations that can be used to reduce the time for locking collateral during payments over multiple hops in a payment channel network.

On the Applicability of Payment Channel Networks for Allocation of Transport Ticket Revenues

“…The two parties in a payment channel can perform transactions by updating the allocation of funds in the channel, i.e., transactions inside a payment channel require only interaction between the two parties and no other third party. Such payment channels can be built over different payment layers such as cryptocurrencies or central bank digital currencies (CBDC) [22]. Implementations of payment channels are for example the Lightning Network [13] on top of Bitcoin and the Raiden Network on top of Ethereum.…”

“…Implementations of PCNs exist for example for Bitcoin and Ethereum. However, the first layer can also be instantiated differently, for example with banks [22], which allows the parties of the PCN to use Central Bank Digital Currencies (CBDCs) instead of cryptocurrencies. This plays an important role for deployability as providers might want to rely on CB-DCs for payments.…”