The Credit Networkis a model for transactions across a network of agents based on bilateral trust between agents . Credit Networks capture many aspects of traditional currencies as well as new virtual currencies and payment mechanisms. In a credit network , if an agent defaults, every other node that trusted it is vulnerable to loss. Alternatively, in a cryptocurrency context, securing a payment channel requires putting capital into escrow to guarantee against default . In this paper, we introduce constraints that bound the total amount of loss that the rest of the network can suffer if an agent (or a set of agents) were to default  . We show that these constraints preserve two important aspects of credit networks. The first is route independence: if there are multiple trust-paths over which a transaction can clear, then it does not matter which one is used. The second pertains to liquidity (i.e. the fraction of transactions that succeed): given a symmetric transaction matrix, any achievable vector of net "credit balances" of the agents is equally likely. This technical property allows us to extend the original analysis of liquidity in credit networks to the constrained case. Surprisingly, aggregate borrowing constraints greatly simplify the analysis and achieve the optimal tradeoff between liquidity and the number of trust-edges .
In order to scale transaction rates for deployment across the global web, many cryptocurrencies have deployed so-called "Layer-2" networks of private payment channels. An idealized payment network behaves like a Credit Network, a model for transactions across a network of bilateral trust relationships . Credit Networks capture many aspects of traditional currencies as well as new virtual currencies and payment mechanisms. In the traditional credit network model , if an agent defaults, every other node that trusted it is vulnerable to loss. In a cryptocurrency context, trust is manufactured by capital deposits, and thus there arises a natural tradeoff between network liquidity (i.e. the fraction of transactions that succeed) and the cost of capital deposits . In this paper, we introduce constraints that bound the total amount of loss that the rest of the network can suffer if an agent (or a set of agents) were to default - equivalently, how the network changes if agents can support limited solvency guarantees . We show that these constraints preserve the analytical structure of a credit network. Furthermore, we show that aggregate borrowing constraints greatly simplify the network structure and in the payment network context achieve the optimal tradeoff between liquidity and amount of escrowed capital .
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The Credit Networkis
In order to scale transaction rates for deployment across the global web, many cryptocurrencies have deployed so-called "Layer-2" networks of private payment channels. An idealized payment network behaves like a Credit Network,
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agents based on bilateral trust between agents
bilateral trust relationships
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the traditional credit network model
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securing a payment channel requires putting capital into escrow to guarantee against default
trust is manufactured by capital deposits, and thus there arises a natural tradeoff between network liquidity (i.e. the fraction of transactions that succeed) and the cost of capital deposits
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- equivalently, how the network changes if agents can support limited solvency guarantees
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two important aspects of credit networks. The first is route independence: if there are multiple trust-paths over which a transaction can clear, then it does not matter which one is used. The second pertains to liquidity (i.e. the fraction of transactions that succeed): given a symmetric transaction matrix, any achievable vector of net "credit balances" of the agents is equally likely. This technical property allows us to extend the original analysis of liquidity in credit networks to the constrained case. Surprisingly,
the analytical structure of a credit network. Furthermore, we show that
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analysis and
network structure and in the payment network context
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the number of trust-edges
amount of escrowed capital