Author: Tamas Blummer 2018-12-27 18:33:18
Published on: 2018-12-27T18:33:18+00:00
The Lightning Network is a potential solution for seamless currency conversions but faces technical barriers due to the use of hashlocked timelocked contracts (HTLCs). HTLCs allow for the transfer of value across different cryptocurrency systems and can also be used for routing payments across different channels. In theory, this could allow for cross-asset exchanges on the Lightning Network. However, using HTLCs as primitives allows for the creation of American Call Options that can be "purchased" for free, leading to a risk-free earning pump that could result in significant liquidity being tied up in stalled forwarding payments with a risk of monetary loss.An American Call Option is a right but not an obligation to purchase an asset at a specific price on or before an expiration date. Nodes advertising cross-asset exchange capability on the Lightning Network could unintentionally create premium-free American Call Options that are exploited by users seeking risk-free earnings. This poses a significant problem for exchange nodes, especially during times of volatility, as they may lose funds due to tied-up liquidity.To address this issue, the author suggests several solutions such as requiring payment for setting up HTLCs, increasing exchange node fees, or limiting the timelock of cross-asset swaps. However, each solution has its drawbacks.In conclusion, while HTLCs allow for the creation of American Call Options on the Lightning Network, their unintended creation as premium-free options makes a multi-asset Lightning Network economically unviable. This could lead to a preference for a single asset across the network.
Updated on: 2023-06-02T16:02:12.055272+00:00