> 1.  It seems to me that there is still friction here.
>     RM, being a trusted third party, may very well charge as much as
> the market will bear. https://nakamotoinstitute.org/trusted-third-par
> ties/
>     This seems to me to imply that OM (i.e. exchange nodes) will be
> unable to extract any sizable fee, i.e. any fees that the market
> would be willing to pay to exchange between assets will be taken by
> RM as rent, and not by the OM who actually makes the market exist in
> the first place.

You may be right about the fees, but that doesn't necessarily make it
an unattractive proposition for the OM party.

When looking at different alternatives by sorting them in a
better/worse fashion rather than a perfect/imperfect fashion, I see
this:

* No exchange: unattractive, because there is significant demand for
this.
* Regular Lightning-based or other HTLC-like atomic swap: unattractive,
because of the exploitable "American Call Option" nature (as we both
described). May only function with a very high spread, compensating for
OM's risk.
* Regular, centralized exchanges: current situation. Third party is
trusted with holding funds and executing trade orders.
* My proposal: third party is trusted with executing transactions
properly (not performing the delay attack).
* Trustless exchange: holy grail, but I don't know how to do that.

So I don't claim my proposal is perfect, but I'd like to argue it is
the best known system because it's an improvement over the current
situation where most people use centralized exchanges, at least in
terms of trust required(*). To compare the two:

I'd like to compare the RM role in my proposal to that of a centralized
exchange. Both need to be trusted to some degree, and since trust
doesn't scale very well (you can't keep track of thousands of parties),
both are probably a natural oligopoly market. As you wrote, these are
the parties that are capable of extracting the majority of transaction
fees. Still, as centralized exchanges show, people are prepared to
trade this way, so apparently it's still an attractive market for both
offer-makers and -takers.

I think the market for RM services in my proposal is more competitive
(and therefore has lower fees) than regular, centralized exchanges,
because:
* trust requirements are lower, so people are more likely to trust a
small, unknown company offering RM services. People using smaller
parties = more parties in the market = lower fees.
* OMs can easily offer the same funds for use with different RM
parties. This is not possible with regular exchanges(**): if you
deposit funds on one exchange, you can't also deposit them on another
exchange, so you have to commit your funds to a single exchange.

Finally, I think the attack RMs can perform on trading parties is an
order of magnitude smaller than the attack a regular exchange can
perform by stealing deposited funds: a RM can only steal the *exchange
rate change* of funds offered for trade, not the full value.

Now, if an RM can be punished, it would be even better. I was thinking
in the direction of collecting proof of misbehavior, which can then
help make the RM lose its (lucrative!) business, but I doubt this is
possible.

CJP

(*) not necessarily in latency: the low latency of centralized
exchanges can be hard to match, even on Lightning.

(**) as long as you can't go short

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