Author: ZmnSCPxj 2019-01-03 13:24:48
Published on: 2019-01-03T13:24:48+00:00
In an email exchange between Lawrence Deacon and ZmnSCPxj, Deacon questioned whether cross-asset lightning nodes offer premium-free American call options. ZmnSCPxj responded by stating that the HTLCs form a single American Call Option, issued by the exchange to the initiator of the payment. The initiator forces the exchange to give it the equivalent of an American Call Option by routing a payment to itself, and the cost of locking the WJT asset is paid by the exchange, not the initiator of the contract.ZmnSCPxj then explained that if x_p = 0, then nobody will act as an exchange since it could be coerced into issuing an American Call Option for free. Therefore, this implies that there will be no cross-asset nodes. Deacon's argument that lightning nodes do not offer premium-free American call options can be true in this case. Deacon's argument was based on a hypothetical scenario where someone wants to purchase 1 WJT for P bitcoins at time t. In order to set up the contract, the person must pay P bitcoins to the contract, incurring an opportunity cost of x_i1. They must also pay the issuer of the contract a premium x_p. The payoff for the person is dependent on the spot price at time t, while the payoff for the other party (issuer) is dependent on the opportunity cost of paying 1 WJT to the contract for time t. If x_p = 0, the issuer is guaranteed a loss, and therefore no rational contract issuer will issue an American call option for free. Even if the opportunity costs were 0, setting up a contract with oneself would have a guaranteed 0 payoff.
Updated on: 2023-06-02T16:21:00.782233+00:00