Fighting Poverty, Profitably: Transforming the Economics of Payments to Build Sustainable, Inclusive Financial Systems

The Gates Foundation's Financial Services for the Poor program (FSP) believes that effective financial services are paramount in the fight against poverty. Nonetheless, today more than 2 billion people live outside the formal financial sector. Increasing their access to high quality, affordable financial services will accelerate the well-being of households, communities, and economies in the developing world. One of the most promising ways to deliver these financial services to the poor -- profitably and at scale -- is by using digital payment platforms.These are the conclusions we have reached as the result of extensive research in pursuit of one of the Foundation's primary missions: to give the world's poorest people the chance to lift themselves out of hunger and extreme poverty.FSP conducted this research because we believe that there is a gap in the fact base and understanding of how payment systems can extend digital services to low income consumers in developing markets. This is a complex topic, with fragmented information and a high degree of country-by-country variability. A complete view across the entire payment system has been missing, limiting how system providers, policy makers, and regulators (groups we refer to collectively as financial inclusion stakeholders) evaluate decisions and take actions. With a holistic view of the payment system, we believe that interventions can have higher impact, and stakeholders can better understand and address the ripple effects that changes to one part of the system can have. In this report, we focus on the economics of payment systems to understand how they can be transformed to serve poor people in a way that is profitable and sustainable in aggregate

A Private Bitcoin Payment Network with Reduced Transaction Fees and Confirmation Times

Since its introduction, Bitcoin cryptocurrency has revolutionized the way payment systems can be designed in a purely distributed manner through its novel Blockchain data structure. While Bitcoin has opened new opportunities, it has been long criticized for its slow transaction confirmation times and high transaction fees. To address this issue, one of the recently emerging solutions is to build a payment channel network (PCN) on top of Bitcoin where the transactions can be made without writing to blockchain. Specifically, a PCN is a network where the users connect either directly or indirectly to send payments to each other in a trustless way. Being backed by the blockchain technology, PCNs satisfy a robust and flexible medium where the exchange of assets become frictionless and thus enable faster transactions with negligible fees. For example, Lightning Network, a second layer network built on top of the Bitcoin network, is being actively developed and it makes Bitcoin possible to be used for micro-payments. However, PCNs including LN bring new challenges on centralization, robustness and privacy as they accept more users. Such problems threaten the very idea of decentralization that comes with blockchain. Therefore, in this dissertation we target the problem of PCN topology formation that will come with ideal features and continue to grow without violating such characteristics. Specifically, we focused on the design of methods for obtaining peer-to-peer (P2P) decentralized PCN topologies. Inspiring from the multi-commodity flow problem, we first developed an optimal solution to establish the perfect PCN topology by utilizing mixed-integer programming. We solve this problem for the required capacities within the network for uninterrupted operation. Second, as mixed integer programming is proved to be NP-compete in complexity, we developed a heuristic optimization approach to take the solution into the polynomial-time domain. Third, to further enable scalability, we developed a new sub-optimal heuristic algorithm using the Dijkstra\u27s shortest path algorithm. Finally, we turned our attention to privacy preservation problem for transactions and augmented each of the proposed approaches with privacy guarantees. Evaluation results indicate that our proposed approaches can enable desirable PCN topology features while respecting the privacy requirements

Towards an Economic Analysis of Routing in Payment Channel Networks

Payment channel networks are supposed to overcome technical scalability limitations of blockchain infrastructure by employing a special overlay network with fast payment confirmation and only sporadic settlement of netted transactions on the blockchain. However, they introduce economic routing constraints that limit decentralized scalability and are currently not well understood. In this paper, we model the economic incentives for participants in payment channel networks. We provide the first formal model of payment channel economics and analyze how the cheapest path can be found. Additionally, our simulation assesses the long-term evolution of a payment channel network. We find that even for small routing fees, sometimes it is cheaper to settle the transaction directly on the blockchain.Comment: 6 pages, 3 figures, SERIAL '17 Worksho