Liquidity in credit networks
Pranav Dandekar, Ashish Goel, Ramesh Govindan, Ian Post · 2011
Credit networks represent a way of modeling trust between entities in a network. Nodes in the network print their own currency and trust each other for a certain amount of each other's currency. This allows the network to serve as a decentralized payment infrastructure---arbitrary payments can be routed through the network by passing IOUs between trusting nodes in their respective currencies---and obviates the need for a common currency. Nodes can repeatedly transact with each other and pay for the transaction using trusted currency. A natural question to ask in this setting is: how long can the network sustain liquidity, i.e. how long can the network support the routing of payments before credit dries up? We answer this question in terms of the long term failure probability of transactions for various network topologies and credit values.