How to Charge Lightning: The Economics of Bitcoin Transaction Channels

TL;DR

This paper analyzes the economic impact of Bitcoin's off-chain transaction channels, particularly the Lightning Network, on transaction fees and miner participation, revealing complex effects on system incentives.

Contribution

It introduces a framework for analyzing the economics of Bitcoin transaction channels and examines their impact on fees and miner incentives.

Findings

Lightning network increases transaction throughput

It may lead to lower miner fees and participation

System incentives are affected by off-chain scaling

Abstract

Off-chain transaction channels represent one of the leading techniques to scale the transaction throughput in cryptocurrencies. However, the economic effect of transaction channels on the system has not been explored much until now. We study the economics of Bitcoin transaction channels, and present a framework for an economic analysis of the lightning network and its effect on transaction fees on the blockchain. Our framework allows us to reason about different patterns of demand for transactions and different topologies of the lightning network, and to derive the resulting fees for transacting both on and off the blockchain. Our initial results indicate that while the lightning network does allow for a substantially higher number of transactions to pass through the system, it does not necessarily provide higher fees to miners, and as a result may in fact lead to lower participation in mining within the system.