Lightning Network Economics: Topology

Paolo Guasoni (), Gur Huberman () and Clara Shikhelman ()
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Paolo Guasoni: School of Mathematical Sciences, Dublin City University, D09 W6Y4 Dublin, Ireland; and Dipartimento di Statistica, Università di Bologna, 40126 Bologna, Italy
Gur Huberman: Columbia Business School, New York, New York 10027
Clara Shikhelman: Chaincode Labs, New York, New York 10017

Management Science, 2025, vol. 71, issue 7, 5477-5490

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 groups of nodes. The paper also evaluates the efficiency of a global configuration, obtaining bounds on the minimum cost 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 (search for similar items in EconPapers)
Date: 2025
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