What Drives Lightning Node Profitability?

If your Lightning experience is anything like mine, you said damn the YouTube videos and reading Reddit posts, let’s spin up this Lightning node, fund it with some Bitcoin and make some bad decisions. I purchased some Bitcoin from an exchange, funded my newly created Lightning wallet, went looking for peers I found on sites like Microlancer and Sats4Likes (in hindsight, such a bad idea), and once I was up and running, I found I couldn’t accept a single Satoshi.

I headed back to Google, and I found I needed inbound capacity, so I purchased some, and all was well with my node. While I wasted money creating a bunch of channels and getting inbound liquidity, I could send and receive Bitcoin, and I was ready to roll.

I am my own bank, and who cares about the cost? I will make it back supporting the network and getting some sweet routing fees, but that was not the reality fees that never came, and eventually, I ate the losses and closed those channels.

This experience of non-custodial Lightning is pretty common and can turn off a lot of users from participating in the network. Lightning is DEFI, but it’s not some DEFI Ponzi scheme where you’re staking Token A to get more of Token A or Pairing tokens A & B to get the absurd interest paid in Token C and hope that there is liquidity to sell into as you get your allocation of farmed tokens.

Lightning does have a yield curve, and Lightning nodes can net an income as well as a positive return on capital, but it is not a given; you still need to actively participate in refining your node footprint to source an optimum return. The Lightning Network is dynamic, but channels are static, and it’s up to users to seek out where to best place their channels and at what size to get the best return.

Looking at the market return

Alright, you’ve got a node up and running, and you’ve got some Bitcoin you’re willing to risk in the Lightning market; the first thing you should do is look at the going rate for liquidity on the Lightning Network.

A good metric to use as a jumping-off point is the LINER Yield which is an annualised rate of return for lightning node operators to allocate liquidity to one another for volume-weighted, variable-duration channels. Since the launch of the metric, we’ve seen yields range between 1.16% to 1.65%.

If this is a return you find attractive, then you should start building a Lightning node footprint; if not, you can continue to hodl on-chain until such a time as the yields look attractive enough for you.

It’s important to note that the LINER yields and APRs many marketplaces provide are not fixed rates. You’re not going to head over to the Lightning Network, add 1 BTC, and automatically walk away with between 1.16 million and 1.65 million satoshis annually as a given; you’ll need to work to find channels that can provide those levels of returns.

What are your expenses?

The first step toward profitability is to look at all the expenses you need to offset to run your node. 

This can include:

• Cost of the hardware if you’re running your own device
• Hosting costs if you’re using a cloud node
• The cost of creating a channels
• The cost of maintaining (rebalancing) the channel
• The cost of any channel closes

Once you have that figure along with your running costs, you can now look at how much capital you can commit and what a reasonable return could be and then factor in how long it would take to cover startup and running costs and leave you in profit. 

Finding your first Lightning friend

To find a good peer, you need to seek out places where traffic would likely flow to and from and see how you can make connections between them. 

When looking at a peer, ask yourself:

• How well connected is the node?
• Is the node sufficiently capitalised?
• Does the node offer competitive fees for the service it provides?
• Has the peer been stable and active for a long period?
• Would creating a new channel to the node be mutually beneficial?

When you connect with a peer, you’re making a bet on future capital flows with them, and predicting which way funds will flow through a brand-new channel takes time and an element of luck.

Channels that drain (funds flow from the outbound to the inbound side) are the greatest opportunity for fee collection, and you can set fees to compensate for the higher flow and required rebalancing, but it can’t be the only way you manage a node. 

The ultimate goal of a Lightning node is to have channels flow relatively evenly in both directions, but accomplishing this is challenging. If you do get it right, it means less manual intervention through rebalancing and fewer fees for you to pay, meaning more profits. 

Evaluating your channels

Once you’ve found a node you think would be a reliable partner and a regular source of traffic, your next step is to evaluate the performance of your decision. The external metric can only get you so far; the best way to watch what happens once you’re connected.

1. Open up as many channels as you feel comfortable managing.
2. Once the channels are open, rebalance the channel to have some remote liquidity, too; this is a must if you’re a new node.
3. Set your ppm to as low as you feel comfortable to encourage activity in the channel, as this first month is your exploration month. 
4. Wait 30 days; this way, you have a month’s worth of data and can measure your annualised return.
5. Monitor your channels to ensure they are not drained and are always available to route payments. 
6. Please note how much it costs to rebalance a channel and ensure you increase the fee rate based on how much you rebalanced and the fee rate of the rebalance. 
7. As you become comfortable with channel management, what you earn and expenses, the next step is to add a premium as you drive this channel towards profitability. 

Data is your guide, don’t fly blind. 

The Lightning Network is still in its early stages of development, according to mempool.space public Lightning Nodes hold just under 5000 Bitcoin, which is a fraction of what sits on and trades on exchanges, never mind the amount moving on-chain daily.  

The Network is not yet as widely used as the Bitcoin blockchain, so there are fewer opportunities to route payments and earn fees, meaning the first few guys through the door have to make the mistakes that the rest of us will learn from, while a select few are netting a profit. 

If you want to be part of the few, you cannot treat this as some passive income. Protocol because it’s not; it’s a job, while there is profit to be made, you need to go out and find it, and many times, you will fail. 

The only way to learn is to make those mistakes early on and as cheaply as possible and then learn from your mistakes and leverage avaialble data.  

• Have a look at the cost of opening up channels to top nodes.
• Have a look at the best-performing channel sizes.
• Have a look at the optimum fee to charge for that channel size.
• Have a look at Lightning automation tools.
• Factor in on-chain costs.
• Factor in rebalancing costs.
• Factor in on-chain fees when opening and closing channels.
• Keep a spreadsheet of all your expenses.
• Benchmark your channels to see your winners and losers and your average return across channels.
• Benchmark your channel returns with the average return of channels your size.

As a routing node, you need to be calculated and ruthless; you must weigh the cost of maintaining a channel versus closing and deploying elsewhere. However, it’s not all about chasing a return; sometimes you need to learn when to stick with a channel, it might be a bad month for that route now, but that doesn’t mean it’s a bad channel, and the next month could be completely different. 

Time is going to be a factor and building up data sets that you can rely on, and the longer you connect with a peer, the more you’ll learn about their value as a connection to your node. 

Building premium Lightning real estate

In the Lightning Network, all liquidity is not created equal; and throwing money at the problem isn’t always the solution. One Bitcoin sitting in a node with low-volume channels can generate far less of a return than half a Bitcoin (50 million satoshis) in a node with a bunch of high-traffic channels. 

As a Lightning node operator, your job is to seek out paths between hubs that regularly transfer Bitcoin and provide on-ramps and off-ramps between these hubs. If you’re slow and methodical in your channel creation, prune those that don’t work, and redeploy new channels where you get better returns, you’re also building up a high-value piece of Lightning real estate. 

As you become a well-connected routing node, the value to connect to your node increases and other Lightning nodes will want to connect to you. Tapping into the groundwork you’ve laid and your traffic allows you to command a premium, and nodes will be willing to pay you to open a channel with them. 

Once you’ve built up a node, another part of your job would be to start advertising your node, which has become a lot easier with liquidity marketplaces such as:

• Magma by Amboss
• Lightning Pool by Lightning Labs
• Ads for Clightning by Blockstream

If you’re looking at using Lightning long term and not trying to only optimise for the satoshis you get today but for a greater payoff in the future, then keep this in mind as you build up a node.

Routing alone doesn’t cut it yet.

Today, there are only so many routing nodes required to help make connections between the top payment destinations, so those working on the outskirts will not be able to generate enough for a return on traffic through their nodes. 

If I spun up a Lightning node today and started opening channels, the chances of me taking away traffic from a node my size isn’t very high, even if I offered lower fees.

But If I spun up my node intending to drive demand, now you’re offering a different proposition.  

• If my node is attached to my eCommerce store to settle payments 
• If my node facilitates payments for everyone, I help set up a BTC Pay server
• If I am selling a digital product or service and accepting Lightning payments

Now you have a reason for traffic to flow through your node, and the routing income is only an additional source of revenue over and above your other activities. 

Lightning doesn’t want dormant liquidity; it wants you to sync up ways that make moving capital worthwhile. If you’re thinking about spinning up a routing node as a business venture, consider coupling it with your existing business or with a reason why payments will be routed to and from you.  

Lightning is still finding its place in the ecosystem.

Some would argue that if users aren’t profitable, they won’t adopt the Network and bother running a node, and yes, there is a case for users aiming to generate a yield; they will look elsewhere. Right now, Lightning doesn’t need more capital, or it would be reflected in the returns. 

That’s the nature of the Network; as it grows and liquidity is needed, yield curves will adjust upwards to reflect that need and attract those sitting on the sidelines pulling in nodes to commit capital. 

We have been relatively fortunate in recent years with a low fee on-chain environment bar a few blips, but as those fees begin to tick up over time, transactions that make no sense on-chain will move to Lightning and with it, more nodes and channels are needed. 

Having an unprofitable node isn’t a deal breaker for everyone, but it needs to be addressed. 

If you’re using Lightning to make payments and avoid on-chain fees, and you’re not too concerned with profits, then having a node running a few channels that don’t pay for themselves makes sense. The motivation to use a cheaper payment option is more than enough to get the average user to switch to Lightning, but these users will not be the ones building effective payment paths. 

Right now, many routing nodes aren’t charging a high fee to help bootstrap the Network, but Lightning can only rely on nodes willing to run at a loss for a while; there needs to be an economic incentive to build out payment hubs through routing nodes.

Lightning node running is a hobbyist activity right now with a few serious actors, the same way mining was in its early years. As the Network begins to move serious volume, you’ll see big players take note, miners will pay more attention to it, exchanges will need to support it, companies will need nodes to support payments, and between those big players will be opportunities for routing node plebs to make connections and profit. 

Are you a Bitcoin and Lightning fan?

Have you been using Lightning to make micro-payments? Stream sats or engage with apps? Which app is your favourite? Do you run a Lightning node? Have you tried all the forms of Lightning payments? Which one do you prefer?

Let us know in the comments down below.