Payment Network Design with Fees

TL;DR

This paper studies how to design payment channel networks with fee structures to maximize profit for providers, proposing algorithms for optimal fee assignment and analyzing different network topologies.

Contribution

It introduces a formal framework for network design with fees, providing polynomial algorithms and insights into near-optimal network structures.

Findings

Optimal fee assignment can be formulated as a linear program for tree networks.

Polynomial algorithms exist for fee optimization in path graphs.

Star networks are near-optimal solutions for network design.

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.