Updated: September 13, 2023

Lightning Channel Strategy Guide and FAQ

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Key Takeaways

This guide/FAQ is designed to give Lightning Network node runners, whether new to the hobby or experienced, a concise breakdown of different channel types and situations.

This guide/FAQ is designed to give Lightning Network node runners, whether new to the hobby or experienced, a concise breakdown of different channel types and situations. Along with the general overview, specific strategies may be laid out to either profit from, optimize, or establish a solid routing strategy for your node. All lightning routing nodes are different, but with these general concepts, you can recognize common situations with your channels and then act appropriately to benefit your node and the network. 

Channel Type Strategy

Fee farming channel vs. routing channel

When you open a channel, it will generally be either a fee-farm or routing channel. A fee-farm channel is a channel you expect to drain from outbound to inbound due to network demand. This channel is usually to a peer whose node provides services to others. These peers need inbound liquidity because their customers use their services or buy things from them. When you open a channel to these nodes, you can expect your channel to drain (that is, move from outbound to inbound) due to the traffic flowing to that peer. 

These channels are ideal for generating fee income (hence, fee-farm channels). Be sure to set the fee rate appropriately and adjust it based on activity. If you set the fees to 1000ppm (for those who do not know, a good reference to remember ppm is 10000ppm = 1%. So, 1000 ppm = 0.1%) and the channel is still moving very quickly from outbound to inbound, you should consider increasing the fees. And if you set the fee rate to 1000ppm, and do not see any draining activity at all, you should consider reducing the fee rate or begin investigating if your other channels have an affinity with the channel you are looking to fee-farm. 

You can investigate by running probe payments out of the channel you are trying to get data on, or looking at the peers of the peer you have the channel with on Amboss. Probing can be performed with applications such as Balance of Satoshis

A routing channel is a channel that in the ideal state, has a frequent liquidity flow in both directions. This means the channel routes out as much as its routes in, thus staying in perpetual equilibrium. It does not drain to the inbound side and then get paralyzed; it does not drain to the outbound side and get paralyzed. These channels are very rare to achieve, as most channels tend to flow one way or another over time. It is, however, one of the most important goals of a routing node.

The heavy outbound newly opened channel

If this is a fee-farming channel, set your fees appropriately or have the fees auto-set in your configuration file. If this channel is to get more liquidity on your node, then you’re all set. If you find that your channel liquidity is depleting quicker than expected, increasing the fee rate on the channel may be wise to optimize income. 

The heavy inbound newly opened channel

Never say no to free inbound liquidity! When someone opens a channel to your node without your solicitation, that is a sign that those out there see your node as having a high probability of being a quality peer. This is a great sign that you are doing a good job at running your node.

A newly opened inbound channel can move inactive capital from your lightning node. For example, say you have an active channel from the inbound to outbound direction. You can use a new inbound channel to self-balance (that is, pay yourself) out of the channel with the heavy outbound to the newer heavy-inbound channel.

You may do this if you expect greater profit from the draining of outbound from the new channel, or because you are looking to re-claim capital by closing a channel heavy on the outbound to redeploy into new channels. 

Most of the time, a new channel that someone opens to you should just be monitored for activity. Even if the new channel is fairly docile, there is rarely any advantage or reason to close a heavy inbound channel. 

Channel Flow

Remember, every successful routed payment involves at least two channels. One channel to receive the payment (this one increases in outbound), and one channel to forward the payment along the route (this one decreases outbound). You only earn fees on the channel where the liquidity moves from outbound to inbound. So make sure you maximize fee income on the channels that go from outbound to inbound.

 Feel free to experiment with fees, but remember every time you change the fee structure on a channel; the information must be propagated over the wider lightning network. If you change fees too often (the timeframe is arbitrary), the network may see your channel as having low reliability. You will want to avoid this. Only change fee rates very deliberately to avoid your node reliability being impacted.

The inactive heavy inbound channel

If the peer is online, and their node has decent centrality, leave the channel open. You gain nothing by closing a heavy inbound channel.

Inactive, heavy outbound channel

If a heavy outbound channel has not seen activity in 3-4 weeks or longer, I would advise closing the channel and redeploying the capital to a different peer that may have better synergy with your node.

The channel that flows both ways

If your node’s liquidity flows from outbound to inbound relatively evenly, then that is a great channel to have. You don’t have to do anything.

Frequently Asked Questions:

What is Node Centrality?

Node centrality is a way to tell at a glance how well your node has access to the wider lightning network. Centrality is expressed in a percentile. For example, if your node is 80th percentile, it means that compared to all other public nodes, you are better connected to the network than 80% of them. An easier way to think of this is that centrality measures the number of paths in the network that your node is a hop on. Centrality percentile does not mean that your node is connected to 80% of the network. This is an important distinction. The easiest way to determine your centrality is by looking up your node on Terminal Web. To increase your node centrality, you can run scripts that analyze the gossip network such as lndpytools

From Terminal Web:

What is the difference between channel balance and node balance?

The word “balance” gets thrown around a lot in the lightning world, and is very confusing. When most people say “balance” they are likely referring to channel balance which is when the outbound and inbound side of a channel is the same or near the same. 

Example: a 5 million sat total capacity channel is split between 2.5 million and 2.5million outbound/inbound would be considered balanced.

Channel balance (thunderhub):

Many node runners are very focused on keeping this balance, but there is actually very little to gain from it. It’s okay to have channels that are heavy one way or another. If you have a channel that is heavy on the outbound side with a peer that funds are likely to flow to, it is not a good idea to “rebalance” that node and remove outbound liquidity that you could have got paid to route to the peer. Be very careful with circular payments and “rebalance” and if you choose to perform a rebalance, be sure to have a very specific reason for it.

Node balance is arguably much more important. Your node balance is the ratio of all of your channels outbound against your inbound. A good rule of thumb is if your node balance skews greater than 70% one way or the other, try to balance it out. 

If your node is 75% outbound, and 25% inbound, you should consider looking for more inbound liquidity. You can purchase channels, run submarine swaps, ask the wider community, and more. For more ways to get inbound liquidity check out this article

If your node is 75% inbound, and 25% outbound, you should consider deploying some capital to open more channels. Choose your peers wisely. Use tools such as Terminal Web and amboss to discover possible good peers to open a channel with. Total node liquidity balance example:

Do I need to care about balance? 

Some node runners obsess over keeping their channels “balanced” with little regard to the amount of fees they pay to the network in order to initiate a self-payment. I would argue that channel balance does not need to be managed. Only the channel flow needs to be managed. By knowing what type of channel you are working with, you will be able to determine optimal actions. It is very rare that a self-payment “rebalance” is a good idea. In fact, the only time this is a good idea is when you are deliberately moving funds through a self-payment to increase outbound on a fe-farming channel. Even then, the fee you pay to do this may not be worth it.

Do I need to put in a lot of work?

Running a well-optimized routing node takes some time, especially at the beginning. In my opinion and experience, a good routing node will ideally want a minimum of 20 channels and a centrality of at least 70th percentile.

You can find your centrality percentile on Terminal Web. Once this is achieved, you are able to maximize fee farming or even liquidity selling on Magma, Pool, or Liquidity Ads. You may also consider starting your own channel marketplace independently. Quality over quantity will help you optimize your capital allocation towards profitable channels.

You will likely have more than 20 channels eventually, but I have that as an arbitrary minimum because you can reach 75th or higher percentile in centrality with around 20 channels. After that, the centrality you can access has diminishing returns, but there is nothing wrong with going up to 40 or more channels for throughput maximization. 

Do I always have to worry about inbound liquidity?

As your node grows and becomes a high-value node, other nodes will open channels without the need for you to solicit them. Other node runners will want to open channels with your node simply because you are running a good node. You can’t earn the major league wage when you are still in the little league, but as your node grows and shows the world it is high value and dependable, others will want to connect to you. Sometimes you may need to use a submarine swap service or do self-channel payments to move liquidity where you want it, though you won’t need to use these services as much as you did when you first started.

What about zero fee routing?

A node that charges zero fees is a strategic play to maximize node throughput. A node with high throughput is the ideal node that a merchant or service provider would want a channel with. Further, a zero-fee node can charge a premium for channel liquidity because of this attribute. A zero-fee node chooses to earn its income on selling liquidity (essentially being paid to open a channel), rather than through traditional routing fees. This is a very acceptable strategy that many are seeing success with.

If you have any questions or comments either email us at support@voltage.cloud, or join us in Discord.

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