One of the first questions many bitcoiners have before starting up a Lightning node is... "Will it be profitable?". I wish there were a simple answer to this question but, like most things, there is nuance. This article will seek to demystify the Lightning node operator profitability outlook. Most of what is written in this article is my personal opinion and in no way should be seen as an authority on the topic. Spin up your own node in 2 minutes, and try it free for seven days.
I want to discuss the two primary ways to earn sats with a Lightning node. The first way is by routing payments for others. The second way is by selling liquidity, a fancy way of saying people pay you for opening channels with them. Let's first talk about forwarding payments.
Forwarding Payments
As a quick refresher, when your node forwards a payment, at least one of your channels increases in local liquidity, and one of your channels decreases in local liquidity. This happens when the automatic pathfinding or the payer determines the route the payment will travel. Many factors play into this decision.
Assuming the payer has not manually defined the route, the pathfinding algorithm may determine that forwarding through your node may be most effective by factoring in health metrics such as, reliability (uptime of node), fee rate (what fees the payer must pay to route a payment through your node), and longevity (how long your node has been a part of the Network). A healthier channel means a higher likelihood of forwarding payments to others, which means you may be able to collect fees.
Now that we determined that the channel is healthy, how do we know what fee rate to set? This is generally determined by the historical activity of the channel. Predicting which way funds will flow through a brand-new channel is not easy. Personally, I like to keep the fee rate low (50ppm or less, which means for every 1 million sats routed you will earn 50) on newer channels for at least a month. This way I can find out if it drains one way or another. Channels that drain (funds flow from the outbound to the inbound side) are where the greatest opportunity for fee collection is found.
A typical order of operations:
- Open Channel.
- (optional) Rebalance the channel so that it has some remote liquidity as well (if a brand-new node, can use LOOP).
- Set ppm to as low as you feel comfortable to encourage activity in the channel.
- Wait 30 days (I believe you can experiment with this).
- Use ThunderHub to determine if the channel drained or not. The other channels you have and the quality of your peers do factor into the probability of this. Just because you don't see activity on a channel doesn't mean it is a bad channel per-se. It may just mean that your other channels aren't sufficient to fully route the payments that the network is looking for.
- After the channel drains, rebalance back into that channel and increase fee rate based on how much you rebalanced and the fee rate of the rebalance. Then add a premium if you wish to make a profit.
Another way is to take time to determine which channels interact the most. Use Lightning public databases such as amboss.space or 1ml.com to see what channels your peers also have. Look at your peers. What fees do they set? What is their average channel size? How long have they been around? Remember, channels to merchants and services tend to drain faster. You will also need inbound liquidity on your other channels to compensate for these routes. Try to have the total outbound and inbound liquidity of all of your channels relatively even if you can to encourage movement.
The ultimate goal is to have a node where the channels flow in both directions relatively evenly. To accomplish this is very challenging but very rewarding. The more this happens, the less you have to do a manual rebalance which means less forwarding fees that you have to pay. Experimentation is key. Also, keep in mind that running a good routing node requires capital. As the price of bitcoin increases, the value of lightning channels also increases. This is great for the lightning network as nodes with smaller sat channels are likely to route more as the price goes up. However, determining your initial capital and planning accordingly is a good idea. The most profitable nodes on the network have over 5 bitcoins in total capacity(not scientific; just my opinion based on my experience).
Selling Liquidity
Let's say you have a well-connected routing node and you have 100,000,000 sats you are looking to open channels with to increase your node's capacity. You realize that a channel from your node has a higher relative value than a channel from a poorly connected node. There are those out there that would love to pay you to open a channel with them. There are services you can participate in that allow you to sell your liquidity.
The most popular tool for this is Lightning Pool by Lightning Labs. This is for those running LND. The GUI for this product is in Lightning Terminal, also known as LiT. In LiT you can go to the pool menu and set parameters for which you would like to be paid to open channels to those looking to buy inbound liquidity from well-connected nodes on the network.
If you are running C-Lightning, a new feature known as ads is available that offers peer-to-peer liquidity matching.
Your Node is an Investment
By this point, you may be thinking, "Gee, I don't have the capital for this, and I won't make more than a few thousand sats in fees per week if I am lucky. Why should I even bother?" That's a good question. Even if you have very few sats to allocate towards a node, you should still run a Lightning node whether it is through Voltage, a custom raspberry pi implementation (mynode, embassy, umbrel, raspiblitz, raspibolt), or manually. The simple reason for this is that we don't know what the future holds. There could be a point in the future where a node started in 2021 may be sought after by big institutions to buy your node from you possibly. Having a reliable node that has been around for years could be seen as a benefit for future interested parties and routes on the network.
I would say that running a node, learning how channels work, and learning anything else you can that involves Bitcoin and the Lightning Network will set you apart and benefit you right now. Having your own node means sovereignty. Just like with base layer bitcoin, a lightning node you control is extremely powerful outside of any desire for profit.
I strongly encourage everyone who is choosing not to run a node strictly based on profit projections to re-evaluate the actual value of running a node. Educational value, future value, sovereign value, etc. are all worth it today without any notion of profit.
Let us come back to the original question, "Are Lightning Nodes Profitable?" The answer is yes, but your profit may not always be measured in satoshis.
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