Bitcoin is often labelled boring and stuffy, the trusted boomer coin that keeps going reliably without fail; it’s got no innovation going for it, so why focus on it, right? To an extent, these critics are correct; bitcoin is boring because it’s a savings technology, it’s meant to be mind-numbingly boring and reliable, but it’s not supposed to do more on the base layer.
Having a base you can verify and run to for final settlement will make future innovations possible, as you always have the robust, tried and tested timechain keeping everything in sync. As for more experimental features, they will and already are starting to show up on abstracted second layers.
The bitcoin Lightning Network is known for its innovation, with its cheap and instant settlement enabling a host of new business models, such as value for value and now trading platforms LN Markets, a Lightning Network-powered Bitcoin derivatives platform, looking to offer traders bitcoin settled trades without having to hand over their funds.
The problem with derivatives trading
If you want to trade in derivatives the most convenient way for retail traders to enter a Bitcoin derivatives position is through centralised exchanges, which currently play two roles at the same time
- Trading venue
- Clearing house
To make sure that buyers and sellers honour their contractual obligations, these exchanges require traders to deposit and maintain an account funded with Bitcoin as collateral, this is known as margin.
By doing so, traders give the ownership of their assets to a third party: they take a counterparty risk. To mitigate that risk, traders could transfer their bitcoins out of the exchange whenever they are not in an active position and do the opposite when they want to enter into a position.
But this is painful and costly as it means navigating various interfaces and wallets. Add to that the slow process of final settlement of bitcoins transfers which usually around one hour to be confirmed and you have a very inefficient market. These issues have made derivatives trading a cumbersome process meaning traders tend to miss market opportunities.
What is LN Markets?
LN Markets acts as a decentralised exchange in that it allows users to connect to the platform using their wallets rather than having to create an account, provide personal data and send money to the exchange and trade. Since you’re only using a wallet as your verification method, there is no KYC or AML to deal with, and since you’re not touching fiat, there is less regulation for traders and the platform.
LN markets is a derivatives exchange, so instead of trading between bitcoin and a stablecoin, you’re trading contracts that are settled in bitcoin.
Standard Bitcoin transactions would be too slow as they provide final settlement, but for quick short-term trades, Lightning wallet-based trading makes a lot of sense since Lightning Network’s instant payment mechanism is the perfect technology for decentralised trading using Bitcoin.
LN markets were founded by a group of ex-traders who left banking for Bitcoin in 2015. After several years of consulting and developing blockchain solutions for financial institutions, Côme Jean Jarry, Victor Afanassieff, and Romain Rouphaël founded the company in Paris, France, in 2019, intending to build an entirely new trading experience with instant delivery versus payments – made possible through the Lightning Network.
Currently, LN markets offer traders two options:
Futures are financial derivative contracts that obligate parties to buy or sell an asset at a predetermined future date and price; you can go long bitcoin or short bitcoin, and if the market trends in the way you predict, you can sell those contracts for a profit.
Options are financial derivative contracts that give the bearer the right—but not the obligation—to either buy or sell an amount of some underlying asset at a predetermined price at or before the contract expires.
Possible expansion of LN markets
Additionally, LN Markets is keen to develop financial products on top of the Lightning Network using the RGB Protocol, which offers a lot more freedom in creating synthetic or representative assets. The RGB network offers a smart contract system built for the Lightning Network that enables the issuance of fungible and non-fungible digital assets, digital identity tokens and more, which could add more options for traders.
Using the new LN smart contract technology, the platform plans to add stablecoins to enable financial products to be quoted in dollars or other fiat currencies in addition to bitcoin.
Additionally, a trading API is also on the roadmap to enable traders to plug into LN Markets directly.
Who would benefit from using LN markets?
So now that you know what LN markets does and how it works, you’re probably wondering who would use it and why?
As an introduction to trading contracts
As novel as this concept is, some people may be confused by how it works. That is entirely normal. It is for this reason LN Markets provides a “testnet version”. Spending testnet coins do not require real-world money, making it a good testing ground to get your head around the platform without risking capital.
Once you’ve understood how to place trades and close them, you can start trading at any amount of satoshis. Making LN markets a good way to get acquainted with the service, as well as the Lightning Network technology itself.
No signups required
Perhaps the most appealing aspect of LN Markets is how users don’t need an account, meaning you can avoid the KYC and AML creep. All that is required to gain exposure to the instruments is a funded Lightning wallet.
Depending on the Lightning wallet one uses, it should be possible to authenticate directly with the LN Markets platform.
There is also an option to create an “account” by sending 100 Satoshis to create a username and password. This latter option should not be explored unless there is absolutely no other option, though.
The platform is designed for account-less authentication first and foremost, so if you lose that wallet or change wallets and forget, it’s bye-bye bitcoin, so make sure you keep track of how you sign up and what funds you deposit. It’s up to you to haul those satoshis off once you’re done trading.
You can find your wallet either with an LN-URL or Lightning Address attached to your account.
Access to up to 50x leverage
LN Markets offers some decent leverage for those looking to amplify their exposure and take on risk. Users can enhance their position up to 50x. A more than acceptable leverage limit, especially given how “limited” liquidity on the Lightning Network still is today.
This puts some constraints on what the platform can achieve, but it is certainly a step in the right direction while the maximum margin per position is limited to 0.01 BTC for now.
As is always the case when experimenting with leveraged trading, positions can quickly be liquidated, so be sure to use those borrowed funds wisely. Users will need to keep tabs on those positions at all times or risk getting forced out of the trade, in which there is no extra charge for liquidation.
Moving to the bitcoin standard
LN markets instantly settled bitcoin trading platform is a big step up compared to the way traditional derivatives platforms handle this situation. Having a decentralised approach to bitcoin derivatives is a novelty and a rather interesting one, too, one that may attract more capital into the space as traders become more comfortable with the high speed of settlement, bring more money into the bitcoin network and since it’s all bitcoin settled, keeping that value inside the network.
Get the app
There you have it, another way to trade bitcoin via the Lightning network, try your hand at earning additional income through trading, learn about how these products work, set up hedges against other trades you may have going or simply have fun degen trading, it is all up to you and how you want to use your bitcoin.
If you’d like to learn more about the app or give it a try, check out the links below.
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