Author: Che Kohler Translated by: Cointime.com 237
If your experience with the Lightning Network is anything like mine, you’re probably cursing the damn YouTube videos and Reddit posts that told us to spin up a Lightning node and fund it with some Bitcoin, and making some bad decisions. I bought some Bitcoin from an exchange, funded my newly created Lightning wallet, and looked for some peers on sites like Microlancer and Sats4Likes (a very bad idea, in hindsight), and once I was up and running, I found myself unable to receive any Bitcoin.
I went back to Google and found myself in need of inbound capacity, so I bought some and my node was in good shape. I wasted some money creating a bunch of channels and getting inbound liquidity, but at this point I could send and receive bitcoin and everything was ready.
I was my bank, who cared about the cost? I would make it back by supporting the network and getting some sweet routing fees, but that was not the reality, the fees never came, and in the end, I took the loss and closed those channels.
This non-custodial Lightning experience is so common that it may turn off many users from participating in the network. The Lightning Network is Decentralized Finance (DeFi), but it is not some DeFi Ponzi scheme where Token A is staked in exchange for more Token A, nor is it pairing Token A and Token B to earn ridiculous interest paid in Token C.
The Lightning Network does have a yield curve, and Lightning nodes do earn income and capital returns, but this is not guaranteed; you still need to actively participate and improve your node size to get the best returns. The Lightning Network is dynamic, but channels are static, and users need to find the best position and appropriate size to get the best returns.
Watching market returns
OK, so you’ve got a node running and some Bitcoin you’re willing to risk on the Flash market; the first thing you should do is check out the liquidity quotes on the Lightning Network.
As a starting point, a good metric is the LINER Yield, which is the annualized return on allocating liquidity between Lightning node operators for volume-weighted, variable-length channels. Since the metric was introduced, we have seen returns ranging from 1.16% to 1.65%.
If you think such returns are attractive to you, then you should start setting up a lightning node; if not, you can continue to hold on-chain assets until the returns are attractive enough for you.
It is important to note that the LINER return rate is not fixed like the annual interest rate offered by many markets. You can't just transfer 1 Bitcoin and automatically get a return of 1.16 million to 1.65 million satoshis per year; you need to work hard to find channels that can provide this level of return.
The first step to achieving profitability is to look at all the expenses you need to offset to run your node.
This may include:
1. Hardware costs if you are running your own equipment
2. If you use cloud nodes, hosting costs
3. The cost of creating a channel
4. Cost of maintaining (rebalancing) channels
5. Cost of any channel closure
Once you have this figure, along with your operating costs, you can now look at how much money you can invest with a reasonable rate of return and calculate the time it will take to cover your startup and operating costs, thus becoming profitable.
You need to look for places where there might be traffic flowing to and from, so you need to find some good peers and see how you can build connections between them.
When looking for peers, ask yourself:
1. What is the connectivity status of this node?
2. Is this node sufficiently capitalized?
3. Are the service fees provided by this node competitive?
4. Is the peer stable and active in the long term?
5. Is there a mutual benefit to the node in creating a new channel?
When you connect with a peer, you are making a bet on future money flows and predicting which direction money will flow through entirely new channels, which takes time and a certain amount of luck.
Channels from outbound to inbound liquidity (funds flowing from the outbound side to the inbound side) are the best opportunity to collect fees, and you can set fees to compensate for higher liquidity needs and necessary rebalancing, but this cannot be the only way you manage your node.
The ultimate goal of a lightning node is to have channels flowing relatively evenly in both directions, but achieving this is challenging. If you get it right, it means less manual intervention, which means more profit.
Evaluate your channel
Once you’ve found a node that you think will be a reliable partner and regular source of traffic, the next step is to evaluate how your decision is performing. External metrics can only help you understand the situation to a certain extent; connecting and observing the changes that occur is the best way to do it.
1. Open as many channels as you can comfortably manage.
2. Once the channel is open, make sure the channel has some remote liquidity by rebalancing, which is necessary for new nodes.
3. Set your ppm as low as possible to encourage activity in the channels as this month is your exploration month.
4. Wait 30 days; this will give you a month’s worth of data to calculate your annualized rate of return.
5. Monitor your channels to ensure they are not drained and are always available for routing payments.
6. Be aware of the cost of rebalancing your channel and increase the fee rate based on the amount you are rebalancing and the rebalancing fee rate
7. Once you are comfortable with channel management, revenue, and expenses, the next step is to increase premiums as you move the channel toward profitability.
Data is your guide, don’t act blindly
The Lightning Network is still in its early stages of development, and according to data from the mempool.space public Lightning node, there are less than 5,000 Bitcoins held, which is only a small fraction of the amount of Bitcoin stored and traded on exchanges, not to mention the amount that moves on the chain every day.
The Lightning Network is not yet as widely used as the Bitcoin blockchain, so there are fewer opportunities to route payments and collect fees, which means the first entrants have to make mistakes while others learn from them and only a few are able to profit.
If you want to be part of this, you can’t think of it as passive income. Because it’s not; it’s a job, and while there are profits to be made, you need to go out and find them, and a lot of times you’re going to fail.
The only way to learn is to make mistakes early and as cheaply as possible, then learn from them and use the available data.
1. Look at the cost of opening a channel to the top nodes.
2. Check the best performing channel size.
3. Check the best rate for the channel size.
4. Understand the lightning automation tool.
5. Consider on-chain costs.
6. Consider the costs of rebalancing.
7. Consider on-chain fees when opening and closing channels.
8. Keep a spreadsheet that records all your expenses.
9. Benchmark your channels to understand your winners and losers and the average return across channels.
10. Compare your channel's return with the average return of channels of similar size.
As a routing node you need to be calculated and ruthless; you have to weigh the cost of maintaining a channel against the cost of shutting it down and deploying it somewhere else. However, it’s not all about chasing returns; sometimes you need to learn when to stick with a channel, now might be a bad month for that route, but that doesn’t mean it’s a bad channel, next month might be completely different.
Time will be a factor and build up a solid data set, the longer you are connected to your peers the more you will learn about their value as a node connection to you.
Building Premium Flash Real Estate
In the Lightning Network, liquidity is not one-size-fits-all; simply throwing money at a problem is not always the solution. 0.5 Bitcoin (50 million satoshis) in a node with a large number of high-traffic channels can generate higher returns than 1 Bitcoin in a node with low-volume channels.
As a Lightning node operator, your job is to find those paths that regularly move Bitcoin and provide imports and exports between these hubs. If you are slow and careful in creating channels, pruning those that are ineffective, and redeploying new channels that earn better returns, you are also building up high-value Lightning real estate.
As you become a well-connected routing node, the value of being connected to your node will increase and other Lightning nodes will want to connect to you. Using the foundation you’ve laid and your traffic, you can demand additional fees that other nodes are willing to pay to establish channels with you.
Once you have set up a node, your next task is to start advertising your node, which is now made easier with the help of liquidity markets such as:
1、Amboss 的 Magma
2. Lightning Pool by Lightning Labs
3. Blockstream’s Clightning Advertisement
If you plan to use the Lightning Network long-term, not just to optimize the number of satoshis you earn today, but for greater rewards in the future, then keep this in mind when setting up your node.
Routing alone is not enough
Today, there are only a handful of routing nodes that need to help connect top payment destinations, so those located at the fringe are unable to generate enough traffic in return through their nodes.
If I spin up a lightning node today and start opening channels, even if I offer lower fees, the chances of taking traffic away from a node of the same size are not very high.
But if I launch my node with the intent of creating demand, now you offer a different suggestion.
1. If my node connects to my e-commerce store to settle payments
2. If my node provides payment services for everyone, I help set up a BTC Pay server
3. If I sell digital products or services and accept Lightning payments
Now you have a reason to have traffic flowing through your node, and routing income is just an additional revenue stream on top of your other activities.
The Lightning Network doesn’t need idle liquidity; it wants you to sync up some meaningful way to move funds. If you’re considering a routing node as a business venture, consider integrating it with your existing business, or find a reason why payments will go through your node back and forth.
Lightning Network is still finding its place in the ecosystem
Some would argue that if users cannot profitably stake on the network, they will not accept the network and will not bother running a node, and indeed for users looking to generate yield, they will look elsewhere. Currently, the Lightning Network does not require more capital, otherwise this would be reflected in the returns.
This is the nature of the network; as it grows and liquidity demands are placed, the yield curve will adjust upwards to reflect that demand and attract nodes that are committed by those who sit on the sidelines.
In recent years, aside from some minor blips, we have had lower fees in an on-chain environment, but as these fees gradually increase over time, transactions that don’t make sense on-chain will move to the Lightning Network, requiring more nodes and channels.
Having an unprofitable node is not an absolute impediment for everyone, but it needs to be addressed.
If you use the Lightning Network for payments, want to avoid on-chain fees, and don’t care too much about profit, then it makes sense to run a few nodes that can’t self-sustain channels. The incentive to use a cheaper payment option is enough for regular users to switch to the Lightning Network, but these users won’t be the ones setting up efficient payment paths.
Currently, many routing nodes do not charge high fees to help start the network, but the Lightning Network can only rely on nodes willing to operate at a loss for a period of time; economic incentives are needed to build payment hubs through routing nodes.
Currently, lightning node operation is a hobby activity with only a few key players, just like mining in the early days. As the network starts processing a lot of transactions, you’ll see big companies start to take notice, miners will pay more attention to it, exchanges will need to support it, companies will need nodes to support payments, and between these big companies, retail routing nodes will have the opportunity to make connections and profit.