Author: Tamas Blummer 2018-12-28 21:22:18
Published on: 2018-12-28T21:22:18+00:00
In a recent email conversation, Tamas Blummer and ZmnSCPxj discussed the issue of making an asset swap offer using HTLC on the Lightning Network. Tying up funds with an offer that can be taken up until the timelock expiry implies both opportunity cost and a premium for optional exercise, yet there is no mechanism in LN to require compensation for these costs. Despite this, exchanges may still make such offers, but with an exchange rate between the assets that compensate them for the cost they incur by making the offer. Exchanges will also limit the quantity of outstanding offers, so they can manage the risk of options written, which might lead to making offers only to known traders or those who pay for receiving an offer with a regular LN payment in-advance.ZmnSCPxj notes that although a market maker could still be profitable as long as the option is worth less than the bid-ask spread, the option premium cannot be charged in the not-exercised branch. This means that rational entities who know of this technique will create options "for free" until the exchange runs out of liquidity, making it impossible to create a multi-asset LN. Routing attempts will usually fail, and the weaker asset network will be further weakened as users leave it for the stronger asset network. The American Call Options drain funds from the exchange until it stops being profitable and operating as an exchange, further weakening the weaker asset network as it becomes even harder to pay from the stronger asset network to the weaker asset network, and so on.
Updated on: 2023-06-02T16:18:05.263970+00:00