Credit Limits beyond Full Collateralization in Decentralized Micropayments: Incentive Conditions

2026-04-28

AI Summary

This study addresses the challenge of enabling undercollateralized credit lines in decentralized, non-custodial micropayment systems while preserving incentive compatibility. By modeling repeated interactions between buyers and merchants under public monitoring, the work formally characterizes, for the first time, the conditions under which undercollateralized credit can be sustained without custodial trust—relying instead on bounded risk exposure, verifiable settlement, and ongoing value alignment. Leveraging game-theoretic analysis and a public monitoring mechanism, the authors implement a low on-chain overhead application-layer prototype on Arbitrum Nitro, demonstrating the feasibility of the proposed framework and uncovering a fundamental trade-off between capital efficiency and the enforceability of incentives.

Abstract

In decentralized non-custodial micropayments, the central challenge is not whether payments can be executed directly, but under what conditions such systems can offer credit limits without requiring full collateral backing. Existing approaches typically tie available credit to posted collateral, causing liquidity requirements to scale with transaction volume and settlement exposure and limiting the practical usefulness of credit-based micropayments. This paper characterizes the incentive conditions under which credit-based non-custodial micropayments can operate beyond full collateralization while remaining incentive compatible. We model repeated buyer--merchant interactions under public monitoring and identify the roles of bounded exposure, verifiable settlement outcomes, and continuation value in deterring strategic default under non-custodial execution. The resulting characterization clarifies the trade-off between capital efficiency and the enforcement conditions required to sustain under-collateralized credit expansion without custodial trust. As an illustrative application-layer instantiation, an Arbitrum Nitro prototype provides execution-level evidence that the settlement, commitment, and incentive-enforcement paths of a credit-limit-based design can be realized with low on-chain overhead.

Problem

• credit limits
• decentralized micropayments
• non-custodial
• incentive compatibility
• under-collateralization

Innovation

• under-collateralized credit
• non-custodial micropayments
• incentive compatibility
• public monitoring
• capital efficiency