Hi, everyone. This article is going to talk about how to earn sats with your Lightning Node by selling liquidity, also known as selling channels to other nodes. We will dive into preparing your node to be considered high quality (worth buying from), and then compare several markets that allow you to sell channels quickly and effectively. Strap in, this is going to be a fun one.
During the very early days of the Lightning Network in late 2018, word was spreading in the wider bitcoin community that running a Lightning Node would mean that you could earn sats from forwarding payments of other nodes in the network. This idea was discussed and predictions were made about the implications and incentives that would possibly develop as the Lightning Network grew.
Now in the middle of 2022, with the Lightning Network pushing 17,000 nodes(with at least one announced channel), people have realized that the expected return on routing fees alone is quite small, especially if the node is allocating low capital towards channels. While a node with 30+ bitcoin capacity and 200+ channels is going to earn more routing fees, that is not really accessible for the majority of Lightning Node runners due to capital restraints.
The good news is that a well performing node is not only measured by the quantity of capital but by the quality of how the capital is allocated. New nodes on the network need inbound liquidity and the fastest way to get inbound liquidity is for another peer on the network to open a channel to the one who needs the liquidity. This requires the one opening the channel to have a reason to do so, as they are in essence locking their capital in the channel. So, how do you incentivize someone to do this?
The Lightning Network isn’t a charity, even though friends often open channels to each other without expectation of return. Nodes have a reputation, and a good chunk of that reputation comes from reliability and the quality of the node’s peers. There needs to be some sort of incentive for a quality node to open a channel to a new node, or in other words, a node that may not be optimized as a routing node.
I am going to assume you have a decently balanced node already with at least 10 channels. For a guide on how to bootstrap a routing node quickly, see my guide here. After this, your goal is to get the six green checkmarks on Terminal Web. This is a quick and easy way to tell if you are running a decent node. To find out what your ranking is, go to Terminal Web and type in your node alias or pubkey.
After you find your node, click it and you will be brought to this screen:
The six check marks are your goal. If you do not have all six checked, your goal should be to work on your node until all six are good. This is a great way at a glance for you and others to see if you are running a good node. You will notice that the total amount of bitcoin is not a metric. The Lightning Network is all about success and throughput, not how much bitcoin you are putting on your node. There are benefits to having large amounts of bitcoin, but it is not required to run a good node. Let’s go through these
- Node is Online. This one’s self explanatory. Your node must maintain uptime and reliability or the network will reject routes through your node. It’s okay if your node goes offline for updates, etc. or even an extended period like a couple days. Reputations do recover, but do not make a habit out of it.
- Plenty of channels. The more channels you have to nodes that are connected to the wider network, the better. You can reach probably 80%+ of the network or more with 15 or so strategically chosen channels to peers.
- Good routing capacity. The larger the channels the better. There are different opinions on the optimal size but in my opinion the average channel size should be at least 2,000,000 sats.
- Many healthy channels. This goes into #2. Many channels are good, but healthy channels are better. Healthy channels are ones with peers that are also well connected, and the network has a high routing success rate.
- Channel stability. Sometimes weird conflicts with TOR or dropped connections can hurt channel stability. Always run on reliable hardware and connections.
- Many good peers. Your node peers are other nodes that you have channels with or can have channels with. The more peers you have to the wider network, the more visibility your node has.
After you have met these 6 requirements, you can consider selling some liquidity. A word of warning though, when you open a channel, your peer will have the inbound and you the outbound. As the inbound gets used, the outbound of that channel (from your perspective) will decrease. This outbound then increases in other channels on your node. This is how forwarding works. It’s very important that your node also has enough inbound liquidity to facilitate these routes. To put simply, run a fairly balanced node.
You don’t have to be completely obsessed and keep it 50-50 the whole time, but if one side becomes 80% or more of the total, I would say consider fixing that. Example: If my total node capacity is 85% outbound and 15% inbound, I may want to utilize a submarine swap such as LOOP or BOLTZ, or buy some inbound liquidity myself. If my total node capacity is the other direction, 85% inbound and 15% outbound, I will try to open more channels or better yet, sell channels (we will get into how to do this momentarily). Excessive inbound on a quality node is in prime position to sell channels for a profit.
After your node is established as one that has enough value to the network to provide channels for a cost, you have to decide how you will go about it. An important note is that after you successfully sell a channel and it is opened, you also get to choose the fee rate on that channel so you can further capitalize on the movement of funds through that channel. Be careful though, some liquidity market places (such as Magma, described below), require you to promise not to increase fees above an a
mount agreed to in the contract. However, if you are less likely to suffer a penalty in some way, you have the option of earning fees from channels that you have opened through a marketplace, allowing you to earn sats not only from the open itself, but from the movement of liquidity in the channel through routing fees.
Let’s talk about LND’s liquidity market first: Lightning Pool.
Lightning Pool was first released in November 2020 and is strictly for those running the LND implementation. Pool is a blind auction liquidity matchmaking service that allows the user to register either a bid order or an ask order. A bid order is an order that is seeking inbound liquidity, and an ask order is an order seeking to provide one. Each side chooses how big the channel is, and what fee they are willing to accept. If they match, then the channel will open automatically. Click here and here for official Pool documentation.
Magma by Amboss is a market board that allows the buyer of a channel to vet and choose which peers they want to buy from. Unlike Pool, everything is out in the open. Similarly to Pool though, the one selling the liquidity puts an offer on the board, and those looking to buy go through the board, using various filters or whatever metrics they deem fit, and choose who to buy from. Magma is usable by both LND and CLN, and possibly other implementations as well. Please check out magma here:
On top of these three, there are node runners who are so well connected and valuable that they have created their own market. Some node runners go to twitter and advertise channels from their node. If someone is interested, they simply contact the advertiser and work out the deal. This can be another great way for any node runner to monetize their node and earn sats.
That’s it for this overview on how to get started selling channels on the Lightning Network. Thanks for reading and as always if you have any questions, comments, or feedback, please contact us on Discord.