IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v70y2024i6p3827-3840.html

Lightning Network Economics: Channels

Author

Listed:
  • Paolo Guasoni

    (School of Mathematical Sciences, Dublin City University, D09 W6Y4 Dublin, Ireland; 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)

Abstract

Compared with existing payment systems, Bitcoin’s throughput is low. Designed to address Bitcoin’s scalability challenge, the Lightning Network (LN) is a protocol allowing two parties to secure bitcoin payments and escrow holdings between them. In a lightning channel, each party commits collateral toward future payments to the counterparty and payments are cryptographically secured updates of collaterals. The network of channels increases transaction speed and reduces blockchain congestion. This paper (i) identifies conditions for two parties to optimally establish a channel, (ii) finds explicit formulas for channel costs, (iii) obtains the optimal collaterals and savings entailed, and (iv) derives the implied reduction in congestion of the blockchain. Unidirectional channels costs grow with the square-root of payment rates, while symmetric bidirectional channels with their cubic root. Asymmetric bidirectional channels are akin to unidirectional when payment rates are significantly different, otherwise to symmetric bidirectional.

Suggested Citation

  • Paolo Guasoni & Gur Huberman & Clara Shikhelman, 2024. "Lightning Network Economics: Channels," Management Science, INFORMS, vol. 70(6), pages 3827-3840, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3827-3840
    DOI: 10.1287/mnsc.2022.01664
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2022.01664
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2022.01664?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
    2. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    3. Graf von Luckner, Clemens & Reinhart, Carmen M. & Rogoff, Kenneth, 2023. "Decrypting new age international capital flows," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 104-122.
    4. Jon Frost & Hyun Song Shin & Peter Wierts, 2020. "An early stablecoin? The Bank of Amsterdam and the governance of money," Working Papers 696, DNB.
    5. Gur Huberman & Jacob D Leshno & Ciamac Moallemi, 2021. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System [Blockchain Economics]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 3011-3040.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paolo Guasoni & Gur Huberman & Clara Shikhelman, 2025. "Lightning Network Economics: Topology," Management Science, INFORMS, vol. 71(7), pages 5477-5490, July.
    2. Changhoon Kang & Jongsoo Woo & James Won‐Ki Hong, 2025. "A Comprehensive Survey of Lightning Network Technology and Research," International Journal of Network Management, John Wiley & Sons, vol. 35(5), September.
    3. Daehan Kim & Jing (Maggie) Chen & Doojin Ryu & Robert I. Webb, 2025. "Bitcoin as a Legal Tender," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 32(4), pages 1175-1188, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Javier G�mez P., 1998. "La Demanda Por Dinero En Colombia," Borradores de Economia 2969, Banco de la Republica.
    2. Mirza Hammad Hassan & Hussain Haroon & Sarwar Ghulam & Habib Haroon, 2024. "Corporate Internationalization and Uncertainty of Cash Holdings: Evidence from an Emerging Market," Zagreb International Review of Economics and Business, Sciendo, vol. 27(1), pages 79-95.
    3. Jan Tin, 2010. "Bequest motives and household money demand," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 269-283, July.
    4. Luisanna Onnis & Patrizio Tirelli, 2015. "Shadow economy: Does it matter for money velocity?," Empirical Economics, Springer, vol. 49(3), pages 839-858, November.
    5. Quoc Trung Tran, 2020. "Corporate cash holdings and financial crisis: new evidence from an emerging market," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 271-285, June.
    6. Hou, Canran & Liu, Huan, 2020. "Foreign residency rights and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. Thakur, Bhanu Pratap Singh & Kannadhasan, M., 2019. "Corruption and cash holdings: Evidence from emerging market economies," Emerging Markets Review, Elsevier, vol. 38(C), pages 1-17.
    8. Dee, Philippa S., 1985. "Demands for real and financial assets in Botswana," Kiel Working Papers 244, Kiel Institute for the World Economy.
    9. David Laidler, 1999. "The Quantity of Money and Monetary Policy," Staff Working Papers 99-5, Bank of Canada.
    10. Reuven Glick, 1984. "The Geometry Of Asset Adjustment With Adjustment Costs," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 7(4), pages 303-314, December.
    11. Furkan Baser & Soner Gokten & Guray Kucukkocaoglu & Hasan Ture, 2016. "Liquidity-Profitability Tradeoff Existence In Turkey: An Empirical Investigation Under Structural Equation Modeling," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 5(2), pages 27-44.
    12. Smith, Bruce D., 1984. "Money, nonconvex preferences, and the existence of equilibrium: A note," Journal of Economic Theory, Elsevier, vol. 32(2), pages 359-366, April.
    13. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    14. Yiling Deng & Haibo Yao, 2021. "Corporate cash holdings and monetary shocks: A test of the credit channel theory," Review of Financial Economics, John Wiley & Sons, vol. 39(2), pages 203-222, April.
    15. Columba, Francesco, 2009. "Narrow money and transaction technology: New disaggregated evidence," Journal of Economics and Business, Elsevier, vol. 61(4), pages 312-325, July.
    16. Adão, Bernardino & Silva, André C., 2020. "The effect of firm cash holdings on monetary policy," European Economic Review, Elsevier, vol. 128(C).
    17. Francisco Salas-Molina & David Pla-Santamaria & Juan A. Rodriguez-Aguilar, 2018. "A multi-objective approach to the cash management problem," Annals of Operations Research, Springer, vol. 267(1), pages 515-529, August.
    18. Salas-Molina, Francisco & Martin, Francisco J. & Rodríguez-Aguilar, Juan A. & Serrà, Joan & Arcos, Josep Ll., 2017. "Empowering cash managers to achieve cost savings by improving predictive accuracy," International Journal of Forecasting, Elsevier, vol. 33(2), pages 403-415.
    19. Abdul Rashid & Maryam Ashfaq, 2017. "Financial Constraints And Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-26, June.
    20. García Cabello, Julia, 2017. "The future of branch cash holdings management is here: New Markov chains," European Journal of Operational Research, Elsevier, vol. 259(2), pages 789-799.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3827-3840. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.