Moral Hazard and Debt Maturity

SSRN Electronic Journal · 2024-01-01 · 4 citations

Moral hazard and debt maturity

Journal of Financial Intermediation · 2024-11-14 · 10 citations

Lightning Network Economics: Topology

Management Science · 2024-10-07 · 6 citations

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. This paper was accepted by Joshua Gans, business strategy. Funding: This work was partially supported by Science Foundation Ireland [Grants 16/IA/4443, 16/SPP/3347], Columbia-International Business Machines Center for Blockchain and Data Transparency, Chaire Fintech at University Paris Dauphine-Paris Sciences et Lettres, Algorand Foundation, and Simons Institute.

Lightning Network Economics: Topology

SSRN Electronic Journal · 2023-01-01

Lightning Network Economics: Channels

Management Science · 2023 · 21 citations

• Computer Science
• Computer Security
• Computer Science

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. This paper was accepted by Joshua Gans, business strategy. Funding: Partially supported by SFI (16/IA/4443, 16/SPP/3347), Columbia-IBM Center for Blockchain and Data Transparency, Chaire Fintech at University Paris Dauphine—PSL, Algorand Foundation, and Simons Institute.

Replication package for: "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System"

Zenodo (CERN European Organization for Nuclear Research) · 2021-01-07

Data and numerical calculations used to create figure 1 ofHuberman, Gur, Jacob Leshno, and Ciamac C. Moallemi. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System". All data was downloaded from free to access websites. The data can be freely copied and used without restriction.

Replication package for: "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System"

Zenodo (CERN European Organization for Nuclear Research) · 2021-01-07

Data and numerical calculations used to create figure 1 ofHuberman, Gur, Jacob Leshno, and Ciamac C. Moallemi. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System". All data was downloaded from free to access websites. The data can be freely copied and used without restriction.

Lightning Network Economics: Channels

SSRN Electronic Journal · 2021-01-01 · 11 citations

Replication package for: "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System"

Zenodo (CERN European Organization for Nuclear Research) · 2021-01-07

Data and numerical calculations used to create figure 1 ofHuberman, Gur, Jacob Leshno, and Ciamac C. Moallemi. "Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System".

Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

The Review of Economic Studies · 2021 · 233 citations

• Computer Science
• Microeconomics
• Economics

Abstract Bitcoin provides its users with transaction-processing services which are similar to those of traditional payment systems. This article models the novel economic structure implied by Bitcoin’s innovative decentralized design, which allows the payment system to be reliably operated by unrelated parties called miners. We find that this decentralized design protects users from monopoly pricing. Competition among service providers within the platform and free entry imply no entity can profitably affect the level of fees paid by users. Instead, a market for transaction-processing determines the fees users pay to gain priority and avoid transaction-processing delays. The article (i) derives closed-form formulas of the fees and waiting times and studies their properties, (ii) compares pricing under the Bitcoin Payment System to that under a traditional payment system operated by a profit-maximizing firm, and (iii) suggests protocol design modifications to enhance the platform’s efficiency. The Appendix describes and explains the main attributes of Bitcoin and the underlying blockchain technology.