When you send a payment through a Lightning channel satoshis move from your side of the channel to your peer’s. In technical terms, we say that this reduces your outbound liquidity. If enough payments are made, you can reach a point where sending any more payments through that channel is impossible. You’ve depleted the channel.
A Lightning Channel is like an hourglass. It has a fixed amount of sand in it that can move to and fro. If there’s no more sand left on one side, you have to turn the hourglass upside down to move the sand back to the other side. This is essentially a channel rebalance: moving back satoshis to your side of the channel, increasing your outbound liquidity, and enabling you to send payments through that channel again. Let’s see how this can be done.
This is a payment that a node makes through a circular path, pushing outbound liquidity available in another channel to the depleted channel.
It works like this: the user selects the channel it wants to rebalance, a channel with available outbound liquidity to be pushed somewhere else, and the amount that will be moved. Then the node will try to find a circular path between the two channels. If it can do so, it will then send a payment to itself through that circular path.
This is an active way of rebalancing a channel, meaning the user controls exactly when it happens. Unfortunately, circular rebalances also have their downsides. The first is the financial cost involved. Since you are required to pay fees for at least two forwards, the expense can quickly add up. Secondly, there’s no guarantee of a circular path between your channels. Finally, it unbalances your peers’ channels.
One can also try to rebalance by changing the fee policy for the channel. If your outbound liquidity is getting too low, you can increase the fees you charge. Doing so decreases the incentive for other nodes to use your outbound liquidity. But for a rebalance to happen, a payment must flow in the other direction, and there’s no guarantee that this will happen. It’s a shot in the dark. If you want to increase inbound capacity for a given channel you can do the opposite: decrease the fees you charge, incentivizing peers to use your channel since it’ll be cheaper than the alternatives.
Rebalancing through fee management is a passive way of rebalancing channels. You have to wait for others to act after changing your fee policy. But you avoid some of the downsides of a circular rebalance. There’s no need to find a circular path, nor the financial costs of paying fees to send a circular payment.
What can be achieved?
The Lightning Network is a work in progress. Rebalancing is an active field of research. If you want to know how rebalancing will probably work in the future, you can read our articles about negative fees, which covers the possibility of charging a negative fee for routing a payment, essentially paying people to use your channel, and about splicing, which is the ability to resize a channel on the go, without the necessity of closing a reopening it.
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