note this part 1 Introduction
The increasing popularity of Bitcoin and other blockchain based payment sys-
tems lead to new challenges, in particular regarding scalability and transaction
speed. During peaks of incoming transactions, the blockchain cannot process
them fast enough and a backlog is created. A second major problem is trans-
action speed, the time from initiating a transaction until one can assume that
the transaction has concluded, and is thus irreversible. With inter block times
typically in the range of minutes and multiple blocks needed to reasonably pre-
vent double spending, transactions take minutes to hours until the payment is
confirmed. This may be acceptable for long-term Bitcoin investors, but not for
everyday shopping or interacting with a vending machine [2].
To solve both, scalability and speed, micropayment channel networks have
been proposed [8,18]. A micropayment channel provides a way to trustlessly
track money transfers between two entities off-blockchain with smart contracts.
If both parties are honest they can commit the total balance of many transfers in
a single transaction to the blockchain and ignore the smart contracts. If a node
crashes or stops cooperating otherwise, the smart contracts can be included in
the blockchain and enforce the last agreed on state.
If two parties do not have a channel, a network of multiple micropayment
channels can be used together with a routing algorithm to send funds between
any two parties in the network. Hashed Timelocked Contracts (HTLCs) provide
a scheme to allow atomic transfer over a chain of multiple channels [8,18,22].
Since micropayment channel networks will keep most transactions off the
blockchain, blockchain based currencies may scale to magnitudes larger user
and transaction volumes. Also, micropayment channel networks allow for fast
transactions, as a transaction happens as soon as a smart contract is signed –
the blockchain latency does not matter.
1.1 Challenges
Micropayment channel networks create new problems, which have not been
solved in the original papers [8,18]. We identify two main challenges – the
blockchain capacity and locked-in funds.
Even with increases in block size it was estimated that the blockchain capac-
ity could only support about 800 million users with micropayment channels due
to the number of on-chain transactions required to open and close channels [9].
A large scale adoption of micropayment channel networks, where, e.g., Internet
Of Things devices have their own Bitcoin wallet, brings the blockchain to its limit
