Game-Theoretic Analysis of (Non-)Refundable Fees in the Lightning Network

TL;DR

This paper models fee structures in the Lightning Network using game theory, proposing a non-refundable fee mechanism that improves payment success rates and reduces costs, while also enhancing security against probing attacks.

Contribution

It introduces a novel non-refundable fee model analyzed through game theory, increasing payment success and security in the Lightning Network.

Findings

Payment success probability increases by 12% with the new mechanism.

Routing fees for senders decrease by approximately 6%.

Probing attacks become significantly more costly for attackers.

Abstract

In PCNs, nodes that forward payments between a source and a receiver are paid a small fee if the payment is successful. The fee is a compensation for temporarily committing funds to the payment. However, payments may fail due to insufficient funds or attacks, often after considerable delays of up to several days, leaving a node without compensation. Furthermore, attackers can intentionally cause failed payments, e.g., to infer private information (like channel balances), without any cost in fees. In this paper, we first use extensive form games to formally characterize the conditions that lead to rational intermediaries refusing (or agreeing) to forward payments. A decision made by an intermediary to forward or not depends on the probability of failure, which they approximate based on past experience. We then propose and analyze an alternative fee model that allows the sender to determine and pay a fraction of the fee to intermediaries in a non refundable manner. A rational sender chooses the fraction such that the intermediaries' utility for forwarding the payment exceeds their utility for not forwarding. Our simulation study, based on real world Lightning snapshots, confirms that our novel mechanism can increase the probability of successful payments by 12 percent and decrease routing fees for senders by about 6 percent if all nodes behave rationally. Furthermore, previously cost free probing attacks now require that the attacker pays 1500 satoshis for every 1 million satoshis inferred. Finally, we propose a modification to the Hash Time Locked Contract to enable secure payments of the non refundable fees.