Balance Transfers and Bailouts in Credit Networks using Blockchains*

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. 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. 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.