Lightning Network Economics: Topology

Abstract

By design, the Bitcoin protocol has a low throughput. The Lightning Network (LN) is a layer-two solution built to increase throughput by cryptographically securing commitments to transactions and only occasionally converting cumulative balances into on-chain transactions. LN channels enable payments between nodes connected by a path of channels. The payment flow through a channel determines its cost. Different channel topologies can support the same underlying flows, but impose different costs. This paper obtains necessary conditions for cost-minimizing topologies by identifying local cost reducing strategies: The first local strategy entails repositioning of channels. The second entails adding hubs to handle the flows of group of nodes. The paper also evaluates the efficiency of a global configuration, obtaining bounds on the cost of the cost-minimizing topology and showing the unusual circumstances in which the cost minimal structure is a hub that connects to all other nodes.

Keywords: payments, lightning network, channels, topology, cost minimization.

JEL Classification: E42, D85