📅 Original date posted:2018-12-28
📝 Original message:
Hi ZmnSCPxj,
Making an asset swap offer using HTLC ties up funds and the offer may be taken up-until the timelock expiry.
Therefore making such an offer implies both opportunity cost and a premium for optional exercise.
There is no mechanism in LN to require compensation for above costs, therefore you imply that no sane person would make such an offer.
I think, that instead exchanges will still make such offers but with an exchange rate between the assets that compensate them for the cost they incure by making the offer.
Exchanges will also limit the quantity of outstanding offers, so they can manage the risk of options written. This might lead to making offers only to known traders or to those,
who pay for receiving an offer with a regular LN payment in-advance.
Tamas Blummer
> On Dec 28, 2018, at 04:34, ZmnSCPxj <ZmnSCPxj at protonmail.com> wrote:
>
> Good morning Tamas,
>
>> Although there is no escape from above reasoning, a market maker could still be profitable as long as the option is worth less than the bid-ask spread.
>> Therefore the issue does not mean that LN cross asset exchange is not feasible, but that there is lower bound on bid-ask spread, that of the option premium.
>
> The option premium cannot be charged in the not-exercised branch.
> This is effectively a premium-free option.
> This means that rational entities who know of this technique will create options "for free" until the exchange runs out of liquidity.
> This is because, even if the exchange rate does not go beyond the bid-ask spread, the not-exercised branch is free of charge.
>
> Since all their liquidity is tied up in premium-free American Call Options, exchange nodes cannot usefully bridge between a BTC Lightning Network and any other asset.
> Routing attempts will usually fail.
> In a very practical sense, it would not be possible to create a multi-asset LN.
>
>
> --
>
> I had long ago figured out that HTLCs can create American Call Options (more than a year ago).
> The problem was that they tied up the assets involved into the contract, so I never bothered to publish this insight.
> However, on LN, HTLCs are created "for free" with no payment, which is a significant advantage to the user of an American Call Option, who would be quite willing to tie up their funds in HTLCs since the not-exercised branch of the American Call Option formed was free of premium.
> Their only cost is opportunity cost, and on the LN, with tiny tiny tiny fees, opportunity cost of having the funds free is very small.
> One can say that the opportunity cost is the premium paid, but note that it is not paid to the exchange, since the exchange itself is also forced to tie up its other asset into another HTLC (meaning it also pays the opportunity cost).
>
> What I suspect will happen is that the LN on the weaker asset (i.e. less popular, fewer users, etc.) will find itself unable to be paid by the LN on the stronger asset.
> This will weaken the weaker asset even further (users will leave it for the stronger asset).
> This creates a shift in exchange rate, which is precisely what the American Call Options are waiting for.
> These American Call Options drain funds from the exchange, until the exchange stops being profitable and stops operating as an exchange, again further weakening the weaker asset as it is now even harder to pay from the stronger asset network to the weaker asset network, and so on.
>
>
> Regards,
> ZmnSCPxj
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Tamas Blummer [ARCHIVE] /
npub1cc…ex8m8
2023-06-09 12:53:39
in reply to nevent1q…0clf
Author Public Key
npub1ccegg9n9lnx6huppxg43m95488yur7pfemkn3pz0agjws5ffvtts0ex8m8Published at
2023-06-09 12:53:39Event JSON
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"content": "📅 Original date posted:2018-12-28\n📝 Original message:\nHi ZmnSCPxj,\n\nMaking an asset swap offer using HTLC ties up funds and the offer may be taken up-until the timelock expiry.\nTherefore making such an offer implies both opportunity cost and a premium for optional exercise.\n\nThere is no mechanism in LN to require compensation for above costs, therefore you imply that no sane person would make such an offer.\n\nI think, that instead exchanges will still make such offers but with an exchange rate between the assets that compensate them for the cost they incure by making the offer.\nExchanges will also limit the quantity of outstanding offers, so they can manage the risk of options written. This might lead to making offers only to known traders or to those,\nwho pay for receiving an offer with a regular LN payment in-advance.\n\nTamas Blummer\n\n\n\n\u003e On Dec 28, 2018, at 04:34, ZmnSCPxj \u003cZmnSCPxj at protonmail.com\u003e wrote:\n\u003e \n\u003e Good morning Tamas,\n\u003e \n\u003e\u003e Although there is no escape from above reasoning, a market maker could still be profitable as long as the option is worth less than the bid-ask spread.\n\u003e\u003e Therefore the issue does not mean that LN cross asset exchange is not feasible, but that there is lower bound on bid-ask spread, that of the option premium.\n\u003e \n\u003e The option premium cannot be charged in the not-exercised branch.\n\u003e This is effectively a premium-free option.\n\u003e This means that rational entities who know of this technique will create options \"for free\" until the exchange runs out of liquidity.\n\u003e This is because, even if the exchange rate does not go beyond the bid-ask spread, the not-exercised branch is free of charge.\n\u003e \n\u003e Since all their liquidity is tied up in premium-free American Call Options, exchange nodes cannot usefully bridge between a BTC Lightning Network and any other asset.\n\u003e Routing attempts will usually fail.\n\u003e In a very practical sense, it would not be possible to create a multi-asset LN.\n\u003e \n\u003e \n\u003e --\n\u003e \n\u003e I had long ago figured out that HTLCs can create American Call Options (more than a year ago).\n\u003e The problem was that they tied up the assets involved into the contract, so I never bothered to publish this insight.\n\u003e However, on LN, HTLCs are created \"for free\" with no payment, which is a significant advantage to the user of an American Call Option, who would be quite willing to tie up their funds in HTLCs since the not-exercised branch of the American Call Option formed was free of premium.\n\u003e Their only cost is opportunity cost, and on the LN, with tiny tiny tiny fees, opportunity cost of having the funds free is very small.\n\u003e One can say that the opportunity cost is the premium paid, but note that it is not paid to the exchange, since the exchange itself is also forced to tie up its other asset into another HTLC (meaning it also pays the opportunity cost).\n\u003e \n\u003e What I suspect will happen is that the LN on the weaker asset (i.e. less popular, fewer users, etc.) will find itself unable to be paid by the LN on the stronger asset.\n\u003e This will weaken the weaker asset even further (users will leave it for the stronger asset).\n\u003e This creates a shift in exchange rate, which is precisely what the American Call Options are waiting for.\n\u003e These American Call Options drain funds from the exchange, until the exchange stops being profitable and stops operating as an exchange, again further weakening the weaker asset as it is now even harder to pay from the stronger asset network to the weaker asset network, and so on.\n\u003e \n\u003e \n\u003e Regards,\n\u003e ZmnSCPxj\n\n-------------- next part --------------\nA non-text attachment was scrubbed...\nName: signature.asc\nType: application/pgp-signature\nSize: 488 bytes\nDesc: Message signed with OpenPGP\nURL: \u003chttp://lists.linuxfoundation.org/pipermail/lightning-dev/attachments/20181228/af759a5d/attachment.sig\u003e",
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