From dave at dtrt.org  Fri Apr  8 23:54:20 2022
From: dave at dtrt.org (David A. Harding)
Date: Fri, 08 Apr 2022 13:54:20 -1000
Subject: [Lightning-dev] Taro: A Taproot Asset Representation Overlay
In-Reply-To: <CAO3Pvs_pkYAYsrAEtv3KuJevXQHBLZQ-ihjP4Ur_A1NjJRA+Lw@mail.gmail.com>
References: <CAO3Pvs_pkYAYsrAEtv3KuJevXQHBLZQ-ihjP4Ur_A1NjJRA+Lw@mail.gmail.com>
Message-ID: <b24d9acc88dbeada62321eaf2ad9cc03@dtrt.org>

Hi Laolu,

[Dropping the CC to Bitcoin-Dev as my questions below are LN focused.]

Thank your for the detailed proposed BIPs.  One question I have is
whether anything about Taro or the way you plan to implement support for
transferring fungible assets via asset-aware LN endpoints[1] will 
address
the "free call option" problem, which I think was first discussed on
this list by Corn? Plooy[2] and was later extended by ZmnSCPxj[3], with
Tamas Blummer[4] providing the following summary:

> Failing to route on purpose can be used to opt out of a previously
> agreed exchange of two different assets.  A rational actor will opt
> out if the exchange is no longer [advantageous to them]. Anyone who
> grants an option for free heads [for] financial disaster.
> 
> This is not an issue for same asset exchange, as in payment routing,
> since the exchange remains [equitable] at any later time point.
> 
> 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.

I know several attempts at mitigation have previously been discussed on
this list, such as barrier escrows[5], so I'm curious whether it's your
plan to use one of those existing mitigations, suggest a new mitigation,
or just not worry about it at this point (as Blummer mentioned, it
probably doesn't matter for swaps where price volatility is lower than
fee income).

***

I'd also be curious to learn what you and others on this list think will
be different about using Taro versus other attempts to get LN channels
to cross assets, e.g. allowing payments to be routed from a BTC-based
channel to a Liquid-BTC-based channel through an LN bridge node.  I
believe a fair amount of work in LN's early design and implementation
was aimed at allowing cross-chain transfers but either because of the
complexity, the free call option problem, or some other problem, it
seemed to me that work on the problem was largely abandoned.

Thanks,

-Dave

[1] https://lightning.engineering/posts/2022-4-5-taro-launch/
[2] 
https://lists.linuxfoundation.org/pipermail/lightning-dev/2018-May/001292.html
[3] 
https://lists.linuxfoundation.org/pipermail/lightning-dev/2018-December/001752.html
[4] 
https://lists.linuxfoundation.org/pipermail/lightning-dev/2018-December/001756.html
[5] 
https://lists.linuxfoundation.org/pipermail/lightning-dev/2019-October/002214.html