Author: Lawrence Deacon 2019-01-03 13:42:44
Published on: 2019-01-03T13:42:44+00:00
The conversation discusses the issue of cross-asset swaps and premium-free American call options on Lightning. The contract issuer and recipient are charged an option price or premium, x_p, which increases with volatility. If the issuer and recipient are the same person, they are guaranteed a loss. However, on Lightning, interest earnings are tiny enough that the premium paid in this manner is minimal, and the upside of the speculative call option is greater. The massive problem here is that the exchange, which enables cross-asset swap, is itself obligated to lock the asset to be called in the contract, violating the principle of "initiator pays". The initiator pays an opportunity cost by depositing funds into the exchange. Due to these issues, on-Lightning exchanges will increase their bid/ask spreads on Lightning compared to custodial exchanges, increasing market friction on cross-asset payments on Lightning. Rational payees may find it more lucrative to accept the more popular asset, identify a trustworthy custodial exchange, and use the lower bid/ask spread on such a trust-based exchange to get more of their desired target asset compared to being paid on Lightning. Therefore, the Lightning network primarily settles on the most popular asset, Bitcoin.
Updated on: 2023-06-02T16:13:32.133591+00:00