Ride the Lightning: The Game Theory of Payment Channels

TL;DR

This paper analyzes cryptocurrency payment networks using game theory, identifying key centrality measures, equilibrium conditions, and efficiency bounds to understand how selfish behavior impacts network topology and performance.

Contribution

It introduces a game-theoretic framework for payment networks, analyzing equilibrium states, social optima, and efficiency bounds based on centrality measures.

Findings

Characterizes Nash equilibria in payment networks.

Identifies conditions for social optima based on centrality.

Bounds the price of anarchy for network efficiency.

Abstract

Payment channels were introduced to solve various eminent cryptocurrency scalability issues. Multiple payment channels build a network on top of a blockchain, the so-called layer 2. In this work, we analyze payment networks through the lens of network creation games. We identify betweenness and closeness centrality as central concepts regarding payment networks. We study the topologies that emerge when players act selfishly and determine the parameter space in which they constitute a Nash equilibrium. Moreover, we determine the social optima depending on the correlation of betweenness and closeness centrality. When possible, we bound the price of anarchy. We also briefly discuss the price of stability.