According to LN social slides, a fee market (in other word: "congested mempool", to my understanding) is good. But, there's systemic risks around penalty mechanism, so some sort of on-chain scaling (which looks like an emergency lane to my understanding) is still needed to mitigate them.

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As far as I understand this is not needed. Let us assume we have an congested mempool and someone publishes an old channel state. This transaction will not be mined directly as the mempool is congested. The timelock during which this transaction can be revoked via the penalty mechanism is a relative one and starts as soon as the transaction is mined. So, this would happen once the fees are down again and then one can use the fees in their breach remedy transaction.

That being said, on-chain fees are a challenge for lightning. While a collaborative channel close can take the current state of the mempool into consideration and adjust the fees so that the channel closes quickly the case of of a unilateral close is much more difficult. When negotiating a new channel state, we don't know what the fees will be in the future. So, when force closing we might have over or underpaid but we can't change the fees anymore since this would require a signature from the unresponsive party.

  • It's well known that some mining pools are selling so-called "tx accelerators" - which is actually "bribe me with some additional tx fees". Therfore, even if the penalty tx may have a higher tx fee rate, it's still possible that the cheating tx got confirmed much earlier than the penalty tx
    – Chris Chen
    Feb 21, 2019 at 4:40
  • that is not a problem! The penalty tx is a tx that spends an output in the cheating tx within a timelock. so there is no chance to mine the penalty tx before the cheating tx got confirmed Feb 21, 2019 at 9:29
  • But it's still possible that the cheater finally extracts funds from expired relative-timelocked output, meanwhile the penalty tx is still stuck in the mempool due to insufficient fee rate.
    – Chris Chen
    Feb 21, 2019 at 10:26
  • Not really as you can set the fees for the penalty tx when pushing it. Since you get all the funds of the channel as a reward you should have quite some liquidity to set the highest fee rates. Feb 21, 2019 at 12:18
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    I think this answer understates the severity of the problem. A worst-case scenario for LN (described in its original paper) is that heavy centralization results in a giant hub; the hub closes all of its channels in a cheating state; users of those channels try to broadcast remedy (justice) transactions, but there's not enough block space for all of them so, no matter how high fees go, it's certain some honest users will lose money (although they can use a scorched-earth policy to prevent the cheating hub from profiting). The solution here is longer timeouts and advertising of scorch policies Feb 23, 2019 at 18:18

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