Economic Security

All operations performed by the network such as processing deposits, withdrawals and deployment of user funds into lightning channels require consensus. While a system of 3f + 1 nodes operating under partial synchrony can tolerate f Byzantine failures, this guarantee is insufficient for a network of nodes managing all of the user’s deposits.

To achieve full collusion resistance we introduce a fraud-proof mechanism for a single honest party to objectively prove misconduct by a dishonest majority and slash their stake. The party submitting a valid fraud-proof receives all of the slashed staked, enabling quadratic scaling of safely manageable TVL with the total network stake.

It immediately follows that the participants in the protocol must be slashable by a “higher authority” such as a Layer 1 blockchain with significantly more economic security. While it would be ideal to build such a system on the Bitcoin Chain, it is non-trivial due to the limited execution environment and stateless nature of the Bitcoin Scripting System.

The next best candidate for a chain hosting the proof verification environment would be Ethereum[7]. Assuming the existence of an independent and trustless relay like BTCRelay[8] submitting block headers from the Bitcoin Blockchain to Ethereum, arbitrary state transitions on the Bitcoin Blockchain can be proven on the Ethereum blockchain. This paper assumes the existence of such a Trustless Relay and an accompanying on-chain BTC Light Client Contract for its fraud-proof constructions