Incentives on the Lightning Network : A Blockchain-Based Payment Network

55 Pages Posted: 4 Mar 2020 Last revised: 13 Oct 2020

Date Written: February 18, 2020

Abstract

The Lightning Network is a decentralized payment network built on top of a block-chain, in which intermediary nodes provide a trust-less routing service for end users. We provide an overview of the current state of the network and show that it can be well approximated by a scale free generative model with a fitness parameter, which suggests that nodes behave strategically on the network. Those strategic interactions between nodes can be described by a Bertrand competition model with capacity constraints. We show that there is a unique equilibrium in which a centralized network is never optimal, and the routing fee is strictly greater than the marginal cost. When nodes are heterogeneous in their opportunity cost of capital only, the equilibrium network structure can match the current state of the network.

Keywords: Blockchain, Lightning Network, Decentralized Payment Network

JEL Classification: C72, D23, D85, G20

Suggested Citation

Bertucci, Louis, Incentives on the Lightning Network : A Blockchain-Based Payment Network (February 18, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3540581 or http://dx.doi.org/10.2139/ssrn.3540581

Louis Bertucci (Contact Author)

Institut Louis Bachelier ( email )

Palais Brongniart
28 Place de la Bourse
Paris, 75002
France

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