LIGHTNING NETWORK ATOMIC EXCHANGES ARE THREATENED BY SPECULATIVE SCHEME

The developers of the Lightning Network (LN) micro-payment network have been discussing the possibility that atomic exchanges between cryptocurrencies, made through this network, could generate the creation of a speculative scheme.

A user known as  ZmnSCPxj  started a thread titled ” Argument to use a single asset in Lightning Network “, through the list of emails of the developers of the bitcoin routing network, on December 27.

The developer explained in detail in the discussion how the Hashed TimeLock Contracts, or temporary processing contracts (HTLC) on which the design of LN is based, could generate the birth of a speculative scheme very similar to the American call options ( american call options ). A previous thread, created by Corné Plooy in May 2018, described the same problem.

In this case, it is an investment scheme in which a buyer of a certain type of option – in this case a cryptocurrency – can exercise the purchase within a definite period of time at will, without the need for the HTLC to expire. This can be used to manipulate the price of the cryptoactive that is being exchanged or to take advantage of the best moments of the market to withdraw its funds.

Recall that the atomic exchanges in LN have allowed direct transfers of BTC to other currencies such as ETH or LTC, taking advantage of the second layer network.

In this way, the speculative scheme would use the timestamp of temporary processing contracts in its  favor , taking advantage of the commitment of the people participating in the exchange in Lightning Network, but liquidating the payment orders at will.

The design of the Lightning Network, which uses the blocking of funds in bitcoins within the network through the HTLC, allows in theory that a person can play with the price fluctuation of a cryptoactive involved in the atomic exchange. In this way, who receives a payment can obtain profits for the price differences for free, because these payments out of time are not penalized by the protocol or require additional fees.

“Users could abuse payments that cross currencies to create almost free short-term option contracts by delaying payment settlement ,” the Bitcoin OpTech team said in its report on the issue.

LN’s time contracts have not been met with special diligence, ZmnSCPxj said, assuring that other issues such as the user’s experience have been addressed, leaving aside the consequences of the operation of the network, as in the case of this potential scheme. speculation.

Due to the concerns of UX, in the Lightning network, there is no cost incurred in the simple configuration of HTLC for routing. By using the low level HTLCs provided as primitives by Lightning Network, one can configure the American Call Options.

However, these American call options can be “bought” for free in LN, and therefore, potentially make money in a completely risk-free manner.

ZmnSCPxj

At least in theory, any Lightning Network node that conducts atomic exchanges on the network will have a considerable amount of its liquidity tied to paralyzed forwarding payments – which would be the American call options – with a significant risk of monetary loss in case of large Fluctuations in the exchange rate of the new cryptoactive.

Since it is a scheme that takes advantage of the HTLC, of ​​great importance for the design of Lightning Network, most of the solutions result in increased friction in the operations of atomic exchanges . The reduction of time, the obligation to publish the limit of the channels among other possible solutions, would make it more difficult to exchange cryptoactives between chains using LN.

However, it should be noted that the design of this network remains completely solvent when dealing with transactions with bitcoins, in which there is no problem of timing and the execution of payment orders, as they are transactions between the chain main, the Lighting Network and again the main Bitcoin network.

Currently, the LN has some 5,235 public nodes , among which there are 18,902 payment channels. In addition, the network has a routing capacity of 562.77 BTC, which is equivalent to more than 2.2 million dollars according to current market prices.

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