Daric: a storage efficient payment channel with punishment mechanism

Lightning Network (LN), the most widely deployed payment channel for Bitcoin, requires channel parties to generate and store distinct revocation keys for all n payments of a channel to resolve fraudulent channel closures. To reduce the required storage in a payment channel, eltoo introduces a new signature type for Bitcoin to enable payment versioning. This allows a channel party to revoke all old payments by using a payment with a higher version number, reducing the storage complexity from O(n) to O(1 ). However, eltoo fails to achieve bounded closure, enabling a dishonest channel party to significantly delay the channel closure process. Eltoo also lacks a punishment mechanism, which may incentivize profit-driven channel parties to close a payment channel with an old state, to their own advantage. This paper introduces Daric, a payment channel with unlimited lifetime for Bitcoin that achieves optimal storage and bounded closure. Moreover, Daric implements a punishment mechanism and simultaneously avoids the methods other schemes commonly use to enable punishment: 1) state duplication which leads to exponential increase in the number of transactions with the number of applications on top of each other or 2) dedicated design of adaptor signatures which introduces compatibility issues with BLS or most post-quantum resistant digital signatures. We also formalise Daric and prove its security in the Universal Composability model.