Introduction
Many bitcoiners who decide to learn about running a lightning node learn quickly that they can earn routing fees. Their next question is, can these routing fees bring in a good income? The answer is yes…but it depends. There are two primary ways to earn sats while running a lightning node. The first is through routing fees, and the other is through leasing channels. We will go through both in this article, including some basic fee strategies.
Why does the Lightning Network have fees?
But first, let’s back up for a second. Why does the lightning network have routing fees, to begin with? To answer this, we have to go back to the basics. But to put it simply, the lightning network is a payment relay network that requires nodes to allocate their capital to connections with other nodes. These connections are called channels. Routing fees are an incentive mechanism for those running nodes to point their capital at destinations where they are likely to receive payments from others in the network. By allocating capital towards in-demand destinations, the network organically reduces the chance of payment failures.
Peer Selection and Capital
Routing node operators need to know that not all of their channels will have high-demand nodes on the network. It is essential to discover peers that may forward payments to you, which you forward to them, and vice versa. This can get complicated quickly, but there are a few points to understand. First, the amount of routing fees you can earn is based on several factors:
- Is your capital allocated to channels in a way that provides value to the network?
- How much capital have you allocated? The more capital you allocate to channels, the more likely you will route more significant payments and earn more fees.
- How many channels do you have, and what is your reach to the broader network? This is also called betweenness or centrality.
Setting Fees Basic Strategy
If profitability is your primary goal, it is important to set fees appropriately. The first thing to do is estimate your on-chain costs for opening a channel and then estimate your on-chain costs for if the channel ever closes. Divide this number by the size of the channel you will open, and multiply by 1,000,000 to get your ppm fee rate to break even on that channel if the channel was to fully route outbound → inbound. Example:
Open cost: 1500 sats
Close cost estimate: 1500 sats
Channel size: 5,000,000 sats
Equation: (1500+1500) / 5,000,000 = 0.0006 x 1000000 = 600ppm to break even, assuming the channel completely drains (flows from outbound to inbound). To make a profit, you must set a ppm higher than 600 on this channel. This assumes the base fee is zero. You can increase the base fee if you wish. Take special note that the larger the channel you open, the lower the fee rate you have to set to break even, assuming the entire channel routes payments from outbound to the inbound side. You will get more used to this process as your journey progresses.
Setting fees to maximize earning potential over a timeframe is also essential. To do this, compare your fee rates to those others set with a specific peer. You can do this by researching https://amboss.space, a public lightning network explorer. Becoming acutely familiar with the way your node interacts with the broader network is vital for extracting the most fees, and thus becoming as helpful as possible for the network as a whole. This takes time and experimentation.
First Goal: Get Your 6 Green Checks
When you are building out your node at the beginning, it is very important to aim towards achieving 6 green checkmarks on https://terminal.lightning.engineering.
The Lightning Terminal also provides an arbitrary ranking board that you can use to get an idea of how well you are running your node compared to others.
Liquidity Leasing
The other way to earn sats on your Lightning node is to provide channels to others. Once you have built out your node and are routing payments frequently, the next step is to get paid for opening channels. Nodes on the network are incentivized to pay for inbound liquidity from excellent peers on the network to help facilitate incoming payments or for their routing purposes. The current largest marketplace for buying and selling these channels is Amboss Magma. You can check out magma at https://amboss.space/magma.
On Magma, you can set your entire sell order with parameters such as channel size range, fees, timeframes, and more. If your order is competitive, others will buy channels from you, and you will be paid for it.
The other options for leasing channels are Lightning Pool if you are using LND, and Liquidity Ads if you are using Core-Lightning.
Reality Check
Running a Lightning Node for the sole purpose of earning an income is a challenging endeavor. It requires a business-like thought process and planning. You cannot earn sats on lightning by simply sending Bitcoin to your node and being passive. One mindset that can be useful is instead of starting a node for the sole purpose of earning, you can start a node for actually using the Lightning Network as a utility for yourself, your business, or your family. For example, you can open a couple channels and use your node to buy things. Or you can use your node to receive payments by paywalling your website or blog, or connect it in some way to your current business or project. You can learn more about what I call the “Low Time Preference” Routing node here.
If you take your time, routing fees will accrue over time, and you will get value out of your node not just from making a small passive income on the side but also from using the full utility that running a lightning node provides. This has value as well. Most nodes are not run in a profitable way, and those that are usually have well over 10 bitcoin in capacity. Keep this in mind. The good news is that as the bitcoin value goes up, channel value goes up as well which means that your channels will be able to move more value around.
Conclusion
As someone who has operated Lightning Network routing nodes for nearly four years, I truly believe that it is a worthwhile endeavor for every bitcoiner after they have learned how on-chain bitcoin functions. The growth in knowledge and the usefulness of a lightning node outside of earning fees is immense. As with most things, going in with the right mindset is of extreme importance. If your goal is to be a top tier node on the network, then be prepared to spend a few hours a week looking at your node’s behavior in terms of channel balances, forwarding, top peers, bad peers, and capital allocation.
Be prepared to join community groups and learn from others such as the plebnet telegram channels. It is also very important to understand the basics of liquidity movement as soon as possible. We have a workshop on liquidity here. Also there is a presentation from tabconf 2023 on how to run an effective lightning node here.
And finally…are lightning nodes profitable? Yes, some node runners are earning a decent amount of sats every month with their lightning nodes, but they are also the ones putting in the most effort and the most capital to do so. They are also minimizing costs by batch opening channels, avoiding costly self payment “rebalances” by setting appropriate fee rates, and monitoring their peers closely. You will get out of your node as much as you put in, both in time and in capital. Focusing on building a routing node isn’t for everyone, but running a Lightning Node for its utility alone definitely is.
