Do Payment Channel Networks Need a Blockchain? - Rethinking Blockchain Layers

One of the fundamental problems in designing digital currencies is the prevention of double-spends. The breakthrough of Bitcoin lies in its seminal idea to use a global blockchain to verify whether a coin has already been spent. Bitcoin’s approach to prevent double-spends, however, has the drawback that it does not scale in the number of transactions issued per second. To address this problem, current research explores building second layer architectures on top of the blockchain, such as payment channel networks. Although these architectures use a blockchain as their underlying layer, they need to solve the problem of preventing double-spends again. As it seems inefficient to solve the same problem multiple times, we explore whether payment channel networks with their way of preventing double-spends can be used to create an architecture for digital payments that is to some extent decentralized but does not require a blockchain as its underlying layer. A payment channel requires from its underlying layer a way to lock a channel’s funds during the lifetime of the channel. Instead of locking funds on a blockchain, this can be implemented by depositing funds at a trusted third party who is trusted to make the funds available again upon channel closure. In our current financial system, users deposit money into their bank accounts and trust their bank to make these funds available upon request. Making use of this trust, we build on the ideas of Tremback et al. and propose an architecture for a payment channel network where banks, or similar entities, perform the role of the underlying blockchain. In this architecture, a bank provides each channel with a unique identifier and locks a channel’s funds. When one party closes the channel, the bank informs the other party. In case of dispute about the channel’s closing state, the bank has to decide which state is most current and close the channel accordingly. By connecting multiple payment channels, a payment channel network can be created, which allows for decentralized payments using traditional currencies. Similar to cash, single payments cannot be tracked by banks in this architecture. To prevent the architecture from attracting illegal activities, the capacity of payment channels could be limited to a maximum value. Compared to exchanging traditional currencies for cryptocurrencies to use a payment channel network, this architecture removes the cost of currency exchanges and the risk introduced by exchange rate fluctuations