Pricing optionality in cross-asset lightning network payments
11-15, 15:50–16:10 (America/El_Salvador), Galoy Stage
Language: English

Bitcoin's lightning network is becoming more multi-asset, at the edges.
The payer of a lightning invoice can decide whether to make the payment or not, and the receiver of a lightning payment can decide whether to settle the payment or not. In a multi-asset network, this optionality, if left unpriced, could be abused to profit on the exchange rate volatility at the expense of market makers.
In this talk, we discuss the problem of unpriced optionality from the perspective of market makers on a multi-asset lightning network. We review mitigation strategies and option pricing models and discuss their effects on user experience, implementation complexity, and risk for market makers.

We are currently writing a review / research paper on the free-option issue. Here we will present the preliminary version of our work.

Outline: LN becomes multi-asset at the edge, a free option issue can be exploited then (option= the right, but not the obligation, to buy a specified asset at a specified price, during a specified time window). We will introduce where/when in the LN payment lifecycle the free option occurs, how much is this a problem, and what are possible mitigations (present and future, custodial and non custodial set up).


Bitcoin TV:

Bitcoiner and data scientist at Galoy.