Good morning,
> On 3 Jan 2019, at 13:04, ZmnSCPxj <zmnsc...@protonmail.com> wrote: > > Good morning Lawrence, > > While true, on Lightning, interest earnings are ***tiny*** enough that the > premium "paid" in this manner is minimal. > Increase in alternative interest earnings for Bitcoin on non-Lightning > alternatives would also cut down the available liquidity on Lightning and > increase Lightning fees. If the contract issuer and recipient are different people, the issuer would charge an option price or premium, x_p, which would depend on volatility. If the issuer and recipient are the same person, they are guaranteed a loss. > > Further, the current nature of cryptocurrency assets is highly speculative > and large swings in exchange rates in short time frames are typical. > Thus the premium paid is minimal compared to the upside of the speculative > call option. This would be reflected in the premium calculated by the contract issuer; x_p increases with volatility. > > Finally, 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. > In particular, the "premium" is ***not paid*** to the exchange node; instead, > the "premium", such as it is, is split between both the exchange and the user > of the American Call Option, and is paid as a temporary decrease in the > supply of both assets to the rest of the economy. > The galling part is that it violates the principle of "initiator pays", since > the exchange, which passively advertises its service, does not initiate the > creation of the American Call Option yet is forced to pay for its existence > by locking its own assets. > The initiator pays an opportunity cost by depositing funds into the exchange. > Given this, the logical consequence is that on-Lightning exchanges will > increase, probably greatly, their bid/ask spreads on Lightning compared to > custodial exchanges, increasing market friction on cross-asset payments on > Lightning. > This means that 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. > > The end result is the Lightning network primarily settling on the most > popular of the assets, i.e. Bitcoin. > > Regards, > ZmnSCPxj > > Sent with ProtonMail Secure Email. > > ‐‐‐‐‐‐‐ Original Message ‐‐‐‐‐‐‐ > On Thursday, January 3, 2019 8:07 PM, Lawrence Deacon > <lawre...@commerceblock.com> wrote: > >> Do cross-asset lightning nodes do not offer premium-free American call >> options? >> >> ============================================================= >> >> I would argue that cross-asset lightning nodes do not offer premium-free >> American call options for the following reasons. >> >> Say I wanted to set up to purchase 1 WJT for P bitcoins at time t < T where >> t is the time I close the contract and T is the expiry time. >> >> In order to set up the contract I must pay P bitcoins to the contract, >> incurring an opportunity cost of x_i1. Assuming we set up the contract at >> time t_0=0, this will be equivalent to the money I could have earned by >> loaning the currency at interest during the period t. >> >> I must also pay the issuer of the contract a premium x_p (in the case where >> I am both recipient and issuer, see further down). >> >> If S(t) is the spot price at time t and K = S(t) - P then the payoff for me >> is as follows: >> >> S(t) > P: K - x_p - x_i1 >> S(t) < P: -x_i1 - x_p >> >> If x_i2 is the opportunity cost of paying 1 WJT to the contract for time t >> then the payoff for the other party (issuer) is as follows: >> >> S(t) > P: -K + x_p - x_i2 >> S(t) < P: x_p - x_i2 >> >> If x_p = 0 then the issuer is guaranteed a loss. Therefore no rational >> contract issuer will issue an American call option for free. >> >> In the case where I am both recipient and issuer of the contract, to get the >> payoff we add the above payoffs: >> >> S(t) > P: -x_i1 - x_i2 >> S(t) < P: -x_i1 - x_i2 >> >> This is a guaranteed loss. >> >> Conclusion >> ======== >> Lightning nodes do not offer premium-free American call options because >> whether or not the contract and issuer are the same person, setting up a >> premium free American call option using a HTLC guarantees a loss for one or >> both parties. Even if the opportunity costs were 0, then setting up a >> contract with myself would have a guaranteed 0 payoff. > > _______________________________________________ Lightning-dev mailing list Lightning-dev@lists.linuxfoundation.org https://lists.linuxfoundation.org/mailman/listinfo/lightning-dev
