Why two-party Bitcoin Lightning channels keep failing

The Lightning Network started as a simple way to reduce the cost and time of small, day-to-day bitcoin (BTC) payments. However, as new research shows, joining and exiting the network with a single peer has created an intractable problem with channel depletion that developers have not been able to resolve for years.

Historically, Lightning users have signed an on-blockchain contract and deposited BTC into a shared wallet with one person already connected to the network, thus creating a two-party payment channel.

Pooling BTC, these channels would connect to other channels and continue to mesh across the globe.

Payments soon route worldwide without incurring Bitcoin’s traditional delays of 10 minute blocks plus mining transaction fees. Finally, when either party wanted to exit, they would broadcast a channel closing transaction to settle their Lightning “bar tab” with on-chain finality.

Unfortunately, two-party Lightning payment channels keep depleting their funds.

Adding more BTC after initially opening a channel has always been a challenge, and despite some promising work on splicing-in liquidity, depletion of funds within two-party payment channels remains one of the Lightning Network’s most sticky problems.

A fundamental problem of two-party channels

A new research paper by a senior Lightning developer, René Pickhardt, argues that depletion isn’t an operational failure but rather a structural property of two-party channels.

His paper shows how the economics, mathematics, and game mechanics of the system will always penalize two-party channels relative to multi-party channels.

According to Pickhardt’s research, every subset of nodes in the network is constrained by a “cut,” or the total capacity of its subset that can connect to the rest of the world.

Cuts limit how much total wealth can move across the network without changing channel topology. Two-party channels obviously create extremely narrow cuts relative to their multi-party counterparts.

Cuts also explain why Lightning reliably handles small payments but sees failure rates rise sharply as payment sizes increase. The answer is simple: larger payments push their portion of the mesh network closer to their cut limit.

Worse, larger payments are more likely to push BTC to one party of two-party channels, which is the literal meaning of channel depletion.

Indeed, a Lightning channel is never drained of funds per se, due to the built-in security features of on-chain channel opening and closing transactions. Lightning channel operators always keep the BTC they agreed to transact, less adjustments for Lightning fees and transactions.

Instead, channels become depleted of their processing capacity when one party eventually gains control of most of the BTC, thus prohibiting the poorer party from routing larger payments.

When two-party channels are depleted, i.e. severely imbalanced, it creates the situation of infeasible routing.