Towards an Economic Analysis of Routing in Payment Channel Networks

TL;DR

This paper models the economic incentives in payment channel networks, analyzing routing constraints and long-term evolution, revealing that direct blockchain settlement can be cheaper even with routing fees.

Contribution

It provides the first formal economic model of payment channel networks and analyzes routing strategies and their long-term implications.

Findings

Sometimes direct blockchain settlement is cheaper despite routing fees.

Economic incentives significantly influence routing choices.

Long-term network evolution can favor direct settlement over channel routing.

Abstract

Payment channel networks are supposed to overcome technical scalability limitations of blockchain infrastructure by employing a special overlay network with fast payment confirmation and only sporadic settlement of netted transactions on the blockchain. However, they introduce economic routing constraints that limit decentralized scalability and are currently not well understood. In this paper, we model the economic incentives for participants in payment channel networks. We provide the first formal model of payment channel economics and analyze how the cheapest path can be found. Additionally, our simulation assesses the long-term evolution of a payment channel network. We find that even for small routing fees, sometimes it is cheaper to settle the transaction directly on the blockchain.