Competitive Policies for Online Collateral Maintenance

TL;DR

This paper develops and analyzes online policies for managing collateral in layer-two blockchain protocols, aiming to maximize transaction value while ensuring security, and introduces competitive algorithms for collateral and wallet replenishment.

Contribution

First to formulate and analyze online competitive policies for collateral and wallet management in blockchain layer-two protocols.

Findings

Developed online policies with competitive guarantees.

Compared policies to optimal offline benchmarks.

Addressed collateral replenishment strategies.

Abstract

Layer-two blockchain protocols emerged to address scalability issues related to fees, storage cost, and confirmation delay of on-chain transactions. They aggregate off-chain transactions into a fewer on-chain ones, thus offering immediate settlement and reduced transaction fees. To preserve security of the underlying ledger, layer-two protocols often work in a collateralized model; resources are committed on-chain to backup off-chain activities. A fundamental challenge that arises in this setup is determining a policy for establishing, committing, and replenishing the collateral in a way that maximizes the value of settled transactions. In this paper, we study this problem under two settings that model collateralized layer-two protocols. The first is a general model in which a party has an on-chain collateral C with a policy to decide on whether to settle or discard each incoming transaction. The policy also specifies when to replenish C based on the remaining collateral value. The second model considers a discrete setup in which C is divided among k wallets, each of which is of size C/k, such that when a wallet is full, and so cannot settle any incoming transactions, it will be replenished. We devise several online policies for these models, and show how competitive they are compared to optimal (offline) policies that have full knowledge of the incoming transaction stream. To the best of our knowledge, we are the first to study and formulate online competitive policies for collateral and wallet management in the blockchain setting.