Good morning Lloyd,
> > I agree.
> > When I was developing American Call Options on top of onchain HTLCs, I came
> > up with a similar construction for ensuring that the premium is paid before
> > the HTLCs setting up the option appear onchain.
>
> I would be interested to see how your construction worked. You can actually
> modify the construction I gave before (in the gist) to create a fair option
> too. You just change it so the asset `C` is paid on both branches of the
> HTLC. This changes `C` from collateral to a premium. This sounds a bit
> different to what you describe as the premium isn't paid before the HTLCs go
> onto the chain.
>
> The only other proposal for options I've seen is:
> https://www.ics.uci.edu/~jamesal1/Swaptions.pdf. I could be missing
> something, but this seems to give Alice a free option on an option in this
> one. The premium payment has the option problem: Bob cannot cancel his offer
> of an option but Alice can take her time to accept it.
I have not read the swaptions yet, but in any case, for the onchain American
Call Option, I came up with the below, which I call roughly "pay for contract".
In this, construction, we promise to publish a contract, but only if we are
paid to do such a publication.
This construction does not work well as a solution to the problem on Lightning
(as it essentially resolves to "failed routes cost the payer money", a bad UX
for payments in a network with partial information of channel status), but may
be of interest otherwise.
Suppose the below situation:
I am selling you a contract that crosses multiple cryptocurrency systems
(blockchains or state update channels or etc).
You will be willing to pay me for such a contract, contingent on the contract
being able to appear completely on all cryptocurrency systems involved.
So we need to make the below UTXOs appear on the BTC and WJT blockchains:
1. BTC: `P` BTC, HTLC: hashlock me and preimage of hash, timelock you at time
`E`+1.
2. WJT: 1 WJT, HTLC: hashlock you and preimage of hash, timelock me at time
`E`.
The above is an American Call Option as before, with you having the option to
claim 1 WJT for `P` BTC at any time on or before `E`.
The setup is that we first have a little ritual.
1. I generate a *different* preimage and hash. Let us differentiate it from
the option preimage by calling this the contract-setup preimage and hash.
2. I prepare on the WJT blockchain the UTXO: 1 WJT, HTLC: hashlock (you+me)
and preimage of contract-setup hash, timelock me at time `S`+1. The time `S`
is the contract setup time, which should be nearer (much nearer) than time `E`.
3. On top of that, I create a transaction spending that UTXO on WJT, and
outputting: 1 WJT, HTLC: hashlock you and preimage of option hash, timelock me
at time `E`.
This is one part of the American Call Option.
I sign this transaction and give it to you.
Notice, that this transaction cannot be confirmed: it is lacking your
signature and the contract-setup preimage.
4. You prepare on the BTC blockchain the UTXO: `P`+`C` BTC, HTLC: hashlock
(you+me) and preimage of contract-setup hash, timelock you at time `S`.
`C` is the premium on the American Call Option.
5. On top of that, you create a transaction spending that UTXO on BTC, with
two outputs:
1. `C` BTC, pubkey: me.
This is my premium.
2. `P` BTC, HTLC: hashlock me and preimage of option hash, timelock you at
time `E`+1.
You sign this transaction and give it to me; again the transaction is
incomplete as it lacks my signature and the contract-setup preimage.
6. I take your transaction and sign it, then add the contract-setup preimage
that I know, and publish it on the BTC blockchain.
The BTC side of the American Call Option has now been set up.
I can now use my premium immediately, and can take the BTC if you ever
publish the option preimage.
7. You take my transaction and sign it.
Since I published the contract-setup preimage in the above step, you can
get that preimage and attach it to the WJT transaction and publish it on the
WJT blockchain.
This now causes the WJT side of the American Call Option to become set up.
If either of us stalls before step 6, or if I stall at step 6, then our assets
revert back to us at time `S` or `S`+1.
I assume we can safely set `S` to something within a few hours or less.
If you stall at step 7 then you have already paid the premium to me at this
point and have no incentive to just not continue the protocol, and at step 7 I
can no longer stall the protocol since you will have everything to continue the
setup of the American Call Option.
Regards,
ZmnSCPxj
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