Towards an Economic Analysis of Routing in Payment Channel Networks

Payment channel networks are supposed to overcome technical scalability limitations of blockchain infrastructure by
employing a special overlay network with fast payment confirmation and only sporadic settlement of netted transactions
on the blockchain. However, they introduce economic routing constraints that limit decentralized scalability and are
currently not well understood. In this paper, we model the economic incentives for participants in payment channel
networks. We provide the first formal model of payment channel economics and analyze how the cheapest path can
be found. Additionally, our simulation assesses the long-term evolution of a payment channel network. We find that even
for small routing fees, sometimes it is cheaper to settle the transaction directly on the blockchain.