Fee-Based Spam Prevention For Lightning

In the discussion regarding the economics of routing payments via a router, particularly in the context of cryptocurrency transactions, it's imperative to understand that simply calculating the cost of capital based on direct earnings from payment routing does not encapsulate the full spectrum of costs and risks involved. The router's fee, often misconstrued as pure profit, must cover several underlying expenses. These include the expected on-chain fees necessary for resolving payments, the inherent risk of loss due to system failures or crashes, computational expenses, and the costs associated with maintaining communication networks. These elements contribute significantly to the determination of both the Upfront Fee and the Success Fee, which are crucial components of the router’s operational cost structure.

Further complicating the economic model is the incorrect assumption of complete capital utilization. It's a fallacy to presume that capital tied up in processing a transaction for two weeks prevents the router from engaging in additional transactions during this period. This overestimation leads to an unrealistic expectation of capital doubling 26 times annually, suggesting an implausible 64 million fold increase in capital within a year. A more grounded approach considers a lower cost of capital, akin to a 19% compounded annual rate of return, which aligns more closely with realistic financial projections and risk assessments.

Moreover, the distribution of costs across the network introduces another layer of complexity. Specifically, the Hold fee, essential for compensating the temporary immobilization of capital during transaction processing, has to account for the cumulative cost of capital across all participating nodes in the transaction chain. This requirement mandates that downstream nodes stake an amount sufficient to cover the maximum anticipated capital costs incurred by all upstream nodes, effectively multiplying the staked amount by a factor of ten at these points in the network. This nuanced understanding of the economic and risk factors underpinning router operation and payment routing provides a comprehensive overview of the challenges and considerations in optimizing router efficiency and profitability.