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Lightning Network Economics: Topology

Author

Listed:
  • 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)

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.

Suggested Citation

  • Paolo Guasoni & Gur Huberman & Clara Shikhelman, 2025. "Lightning Network Economics: Topology," Management Science, INFORMS, vol. 71(7), pages 5477-5490, July.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:7:p:5477-5490
    DOI: 10.1287/mnsc.2023.03872
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