Payment Network Design with Fees

Abstract

Payment channels are the most prominent solution to the blockchain scalability problem. We introduce the problem of network design with fees for payment channels from the perspective of a Payment Service Provider (PSP). Given a set of transactions, we examine the optimal graph structure and fee assignment to maximize the PSP's profit. A customer prefers to route transactions through the PSP's network if the cheapest path from sender to receiver is financially interesting, i.e., if the path costs less than the blockchain fee. When the graph structure is a tree, and the PSP facilitates all transactions, the problem can be formulated as a linear program. For a path graph, we present a polynomial time algorithm to assign optimal fees. We also show that the star network, where the center is an additional node acting as an intermediary, is a near-optimal solution to the network design problem.Keywords: blockchain · layer 2 · channels · lightning protocol 1 IntroductionScaling the transaction throughput on blockchain systems, such as Bitcoin [12] and Ethereum [1], is a fundamental problem and an active research direction [4]. Many solutions have been proposed, in particular sharding [8,10], sidechains [3] and channels [5,13,2,9]. Channels seem to be the most promising solution since they allow transactions to occur securely off-chain, and use the blockchain only for resolving disputes. We study the problem from the viewpoint of a Payment Service Provider (PSP). The PSP wants to establish an alternative payment network for customers to execute transactions. We assume a PSP can open a channel between two parties without acting as an intermediate node; this can be done using three-party channels. The two parties and the PSP join a three-party channel funded only by the PSP who then loans money to the other parties. We assume that the PSP will eventually get his money back in fiat currency as he provides a service similar to credit cards (the risk lies to the PSP). Furthermore, the PSP signs each new state if and only if the fees have the correct value. This way he enforces the fee assignment on the channels. Initially, a PSP will compete with the blockchain: customers only prefer the alternative network if the total fees cost less than the blockchain. We introduce the network design problem for the PSP, whose goal is to decide the graph structure and the fee assignments in order to maximize its profit.

Payment Networks as Creation Games

“…Their goal was to find an optimal strategy for a central coordinator, a socalled payment service provider. In contrast to [5,7], our work studies a situation with multiple players. In other words, our work is rooted in the area of game theory, whereas [5,7] was using optimization methods.…”

Building Stable Off-chain Payment Networks

“…Most of the optimization and algorithmic research works done by a team resided in the ETH university. Avarikioti et al [10] study the optimal structure of the channels' network and the allocation of charges to them to maximize the profit of the payment service provider (PSP). In their other work [11], proposes three optimization problems in the context of payment network design.…”

Fail-safe Watchtowers and Short-lived Assertions for Payment Channels

“…The Disclose Cascade Watch Commit (DCWC) scheme [7] proposes to incentivize multiple third parties to provide watching services, where only watchtowers whose participating evidences are included on chain get paid. However, each party has to be responsive and synchronized with the blockchain at all times.…”