Good morning list, I've been thinking a lot about liquidity ads recently, and I want to highlight some subtleties that should be taken into account in the protocol design. This is a rather long post, but I believe this is important to make sure we get it right and strike the right balance between protocol complexity and incentives design. Strap in, grab a coffee, and enjoy the ride.
First of all, it's important to understand exactly what you are buying when paying for a liquidity ad. There are two dimensions here: an amount and a duration. If Alice buys 100 000 sats of inbound liquidity from Bob for one month, what exactly does that mean? Obviously, it means that Bob will immediately add 100 000 sats (or more) to his side of the channel, and Alice will pay a fee proportional to that amount *and* that duration (because locking funds for one month should cost more than locking funds for one day). But is that really the only thing that Alice is buying? The current spec proposal adds a CLTV of one month to the seller's output in the commitment transactions. Without that CLTV, the seller could accept the trade, and immediately close the channel to reuse the funds elsewhere. This CLTV protects the buyer from malicious sellers. But it is actually doing a lot more: what Alice has bought is actually *any* liquidity that ends up on Bob's side, for a whole month. And the issue is that this is impossible for Bob to price correctly, and can be used for liquidity griefing attacks against him. Imagine that Alice opens a 1 BTC channel with Bob and asks him to add 10 000 sats of inbound liquidity for a month. This sounds interesting for Bob, because Alice is bringing a lot of funds in, so he can expect payments to flow towards him which will bring him routing fees. And she isn't asking for a lot of liquidity, so Bob can definitely spare that. But then Alice sends all the channels funds through Bob to Carol. This means that Bob now has 1 BTC locked for the whole month, while Alice only paid for 10 000 sats! He earned some routing fees, but that isn't enough to make up for the long duration of the lock. If payments keep flowing in both directions with enough velocity, this is great for both Bob and Alice. But if the channel is then unused, or Alice just goes offline, this was a very bad investment for Bob. With splicing, Bob cannot even know beforehand how much liquidity is potentially at risk, because Alice may splice funds in after paying for the liquidity ad. If Alice pays for a 10 000 sats lease, we only want those 10 000 sats to be encumbered with a CLTV. But this is actually not enforceable. We could create a separate output in the commitment transaction with the leased funds and a CLTV, while keeping the rest of the seller's funds in a normal output that doesn't have a CLTV. But then what happens when HTLCs are relayed and then failed? To which output should we add the funds back? Any strategy we use here can be exploited either by the seller to drain the leased funds back to its non-CLTV-locked output, or by the buyer to keep funds in the CLTV-locked output forever. Adding a CLTV thus protects the buyer at the expense of the seller. In some cases this is ok: if you are a new seller who wants to attract buyers, you may be willing to take that risk. But in most cases, the seller is going to be more reputable than the buyer, and has more incentives to behave correctly than the buyer. When buying liquidity, you will likely look at the network's topology, and buy from nodes that are well-connected, or known to be reliable. Or if you are a mobile wallet user, you'll be buying from your LSPs, who have incentives to behave honestly to earn fees and attract new users. In those scenarios, the buyers will very often be new nodes, without any public channels, which means that the seller has no way of knowing what their incentives are beforehand. It thus makes more sense to protect the seller than to protect the buyer. For those use-cases, the simplest solution is to not add a CLTV at all: the buyer is taking the risk that the seller removes the liquidity before the end of the lease. But if that happens, they'll just mourn their lost fees, blacklist that node, and move on. There will be a lot more buyers than sellers in that market, so I believe that this model makes sense for most large public nodes. I think that both use-cases should be supported, so I suggest making the CLTV enforcement of the lease optional. It will be up to each seller to decide whether they are willing to take the risk of locking their funds to attract buyers or not. Sellers can (should) price that additional risk in their advertised rates. In the case where the CLTV is enforced, splicing brings in additional subtleties. We should prevent the seller from making any splice-out, otherwise they would effectively be bypassing the lease CLTV. But we should allow the seller to splice-in, and the buyer should still be allowed to splice-in and splice-out. Unfortunately, the seller can prevent the buyer from splicing funds in and out of the channel, by simply adding splice-out outputs in any splice attempt: the buyer has no other choice than aborting that splice. I initially thought that we could actually use splice-out to get the best of both worlds: add a CLTV on the seller's output, but allow them to splice-out whatever funds are "in excess" of the leased amount. But that doesn't work, because the buyer can unilaterally reject the splice attempt, and the seller still ends up with all their funds locked for the lease duration (even though the seller can also play the abort game to prevent the buyer from making any splice, as described above). Thanks for reading this long post, I think this will be useful if you are planning on selling liquidity through liquidity ads, as you should fully understand the drawbacks of the CLTV lock. I do want to highlight that this is a great protocol, and that a liquidity marketplace is an important building block for lightning. We'll be working hard to make sure you can find this in your favorite implementations soon! Cheers, Bastien
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