Balance Transfers and Bailouts in Credit Networks using Blockchains

Abstract: In this paper, we propose a technique for rebalancing link weights in decentralized credit networks. Credit networks are peer-to-peer trust-based networks that enable fast and inexpensive cross-currency transactions compared to traditional bank wire transfers, which has led to their increasing popularity and use. Although researchers have studied security of transactions and privacy of users of such networks, and have invested significant efforts into designing efficient routing algorithms for credit networks, comparatively little work has been done in the area of {replenishing} credit links of users in the network. Replenishing links at regular intervals in a credit network is important to keep users solvent, the network viable with enough liquidity, and to prevent transaction failures. This is achieved by a process called {rebalancing} that enables a poorly funded user to create incoming as well as outgoing credit links. We propose a system where a user with zero or no link weights can create incoming links with existing, trusted users in the network, in a procedure we call {balance transfer}, followed by creating outgoing links to existing or new users that would like to join the network, a process we call {bailout}. Both these processes together constitute our proposed rebalancing mechanism. Our techniques would also serve to make the network more competitive by offering users lower rates of interest, and enable users to earn routing fees-based revenue by participating in high throughput transaction paths.