Peter Todd: Bitcoin Lightning Network May Fail

The Lightning Network is considered by many in the Bitcoin community to be the most promising long-term solution for scaling the Bitcoin network. The concept uses payment channels to execute Bitcoin transactions off-chain, with the blockchain acting as a backup processing system that kicks in when someone misbehaves. The creators of the Lightning Network estimate that the network will eventually be able to process billions of transactions per second.

While a combination of smart contracts and game theory are used to ensure the system operates correctly, at the Bitcoin in Use conference late last month, Bitcoin Core contributor Peter Todd explained a possible failure mode that the Lightning Network could experience.

The possible failure mode discussed in this post was discovered early in the development of the Lightning Network and is discussed in the Lightning Network whitepaper. This post is not an attempt to give Todd credit for discovering this failure mode. He only gave a brief overview in a recent talk.

Lightning Network failure modes

The scenario Todd describes where Lightning could fail occurs when a large number of people on the bitcoin network need to resolve their Lightning disputes in a short period of time.

"There are indeed scenarios where the Lightning Network can fail: Imagine a bunch of transactions that need to be settled at the same time, and the Bitcoin network can only handle a limited amount of data. If we quickly shut down a lot of Lightning Network channels, how will we confirm these transactions? At this point, it's beyond our capacity." There is also a scenario where when a large number of people need to settle Lightning contracts on the blockchain, the fees charged may rise sharply because there is not much space left in the Bitcoin block. Todd said: "At a certain point, people will start to lose money because the transaction costs are beyond their ability to bear. If you use the Lightning Network a lot, then the cost is quite high. This may cause the Lightning Network to fail."

For the Lightning Network to work, users must be able to issue a default relief transaction to keep their peers honest. If a user fails to make the correct transaction on the blockchain within a certain time, his competitors can control the bitcoins tied to the smart contract between the two parties.

Possible solutions

Any situation that could result in the theft of Bitcoin needs to be avoided, and according to Todd, there are a few theoretical solutions to this problem. One is an adaptive block size limit that would allow miners to increase block capacity in these failure scenarios. Another solution would be to allow Lightning Network miners to pre-reserve space in future blocks to ensure that miners can broadcast transactions on the blockchain before the time synchronization expires.

That being said, Todd said there isn't really a vetted solution yet.

“It’s a very complex process and we’re not at the point where we can confidently say: ‘Yes, we’re going to have people all over the world buying coffee with the Lightning system.’ There’s a lot of work to be done and I think it’s going to be a very slow process to figure all of it out.” What could lead to this scenario?

One reason Todd worries about this disaster scenario is that users might become complacent because they ignore what others on the network are doing.

“As a lightning user, it’s hard for me to know how many people are going to suffer from a large number of lightning channels failing at the same time,” Todd explained. “That’s not clear to me; I wouldn’t necessarily be able to react to that.”

One factor that could contribute to the Lightning Network failure mode, which was also clearly expressed by BitGo engineer Jameson Lopp, is that the network topology is too centralized. If many of the big players in the Bitcoin network fail at the same time, all of the peers connected to the node must resolve their smart contracts on the blockchain in a timely manner.