What Are Liquidity Ads?

Liquidity ads

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The Lightning Network, Bitcoin’s highway for fast and cheap payments, thrives on liquidity. But getting that liquidity there can be tricky. Enter liquidity ads, a protocol that empowers nodes to actively advertise their willingness to contribute funds and smooth out the flow of satoshis (Bitcoin’s tiniest units).

Imagine you’re running a node on the Lightning Network, a bustling metropolis of payment channels. You have some spare sats and want to help out, but how do you connect with someone who needs them? 

Imagine you’re new to the Lightning Network, you don’t have any friends to open channels with; you’re a bit of a Lightning loner; how do you find peers to link up with? Tinder? Sure, you could hit up Liquidity Markets and see what channels are up for sale and if one fits your size, or you could advertise your personal requirements and send out the bat signal, hoping someone hears the call. 

That’s where liquidity ads come in.

Why inbound liquidity is a pain

Inbound liquidity is incredibly important; it’s the biggest pain point for users and the first stumbling block new Lightning users face for accepting and routing on Lightning. Your total inbound liquidity is the upper limit on the funds you’ll be able to receive over Lightning, and that cap or limit also impacts the total amount of routing fees you’ll be able to earn.

Suppose your node has a capacity of 100,000 sats inbound and 100,000 sats outbound. It can earn fees by passing payments through its channels, but the initial inbound capacity caps its earning potential.

If you hit that inbound capacity cap, your channel is nerfed, and you will rebalance your channel or open a bigger channel to lower the chances of rebalancing. 

When launching a Lightning channel with the intent of paying someone, the process runs relatively smoothly because your first payment will give you space for inbound payments; it is when you open a channel and expect to receive a bunch of payments that inbound becomes the big bad boogyman. 

Dual funding isn’t easy to coordinate

Dual-funding has a coordination problem because it’s hard to know if a peer will want to place funds into a channel with you unless you ask them. Trying to contact nodes and find someone to open a channel with is not particularly efficient, so having them come to you is a far better option.  

What are Lightning Liquidity Ads?

Lightning Liquidity Ads are a recently introduced specification proposal implemented in v0.10.1 of c-lightning, aimed at enhancing the Lightning Network. These ads provide a lightweight and decentralised method for nodes to coordinate and deploy liquidity across the network.

A liquidity ad allows a node, like “Frodo” to announce that it’s willing to commit funds to a channel when another node, like “Sam,” opens one with Frodo. Furthermore, the ad implies that “Sam” would compensate Frodo for providing this liquidity. This arrangement enables immediate sending and receiving over the new channel since both sides would have committed funds from the outset.

Share the channel load.

Think of them as classifieds for Lightning channels. 

You post an ad, specifying the amount of sats you’re willing to contribute, the type of channel you prefer (inbound or outbound), and your desired fees. This ad is then broadcast to other nodes on the network, like a beacon to other channels that either thirst for liquidity or have some to spare.

When another node needing a channel sees your ad, it can open a channel directly with you, claiming a portion of your advertised liquidity. They pay your set fees, everyone gets happy, and the network hums with newfound efficiency.

Here’s what makes liquidity ads special:

  • Decentralised control: No central exchange or authority dictates who gets liquidity. You choose with whom you share your sats.
  • Directly connect: Open channels directly with nodes based on mutual needs, bypassing intermediaries.
  • Flexible funding: Advertise your exact contribution size, ensuring efficient use of your sats.
  • Fee transparency: Set your desired fees upfront, giving both parties clear expectations.

But like any innovation, liquidity ads come with some caveats:

  • Technical complexity: Setting up and managing liquidity ads requires deeper technical knowledge than the average user.
  • Counterparty risk: You’re directly trusting the receiving node, so choosing your partners wisely is crucial. Looking for the cheapest option might always signal the best, and premiums will be charged by users with a better reputation. 
  • Market dynamics: Liquidity ads introduce a dynamic market for channel funding, which can influence fees and overall network liquidity.

Despite these challenges, liquidity ads hold immense potential:

  • Improved channel growth: More proactive advertising could lead to faster channel creation and network expansion.
  • Lower fees: Increased competition for liquidity could drive down fees, benefiting everyone.
  • Greater user control: Nodes gain more power in managing their liquidity and choosing their counterparties.

Every decision has to make a trade-off

The protocol also has to deal with complex considerations such as the duration and amount of liquidity being purchased and how to handle the locking of funds to protect participants. T

The concept of using CLTV (Check Lock Time Verify) encumbrance is also mentioned as a way to ensure the seller doesn’t prematurely close the channel and reallocate the funds elsewhere, thus protecting the buyer.

While having a way to advertise the need for liquidity, there are still plenty of intricacies involved in pricing the liquidity correctly and avoiding potential exploits or griefing attacks where large amounts of funds could be locked unexpectedly. 

The pros 

  • Only one on-chain transaction is required to lease inbound liquidity. 
  • Any node with a single public channel can create an advertisement.
  • You know exactly who your new channel peer will be before the lease is committed to
  • Leases have a time limit of a month (4032 blocks)
  • Peer commits to a cap on routing fees they’ll charge to route payments with the leased funds.

The Cons:

  • No guarantee that liquidity is available. The node may be out of capital or unable to provide the amount that you’re requesting.
  • Nodes looking to lease funds will have to determine the rate for their capital ahead of time (no auction mechanic for valuing it out of the box).
  • The market for liquidity may be thinner, as anyone can request liquidity from you at any time.
  • Have to do your own research about the peer offering the liquidity.
  •  Funds that are leased are encumbered by a CSV lock for the to_remote output.

Liquidity ads are starting to roll out in different forms.

Recently, Phoenix Wallet has announced its own form of a Liquidity ad allowing users of its wallet to purchase inbound liquidity from their ACINQ LSP. Users will now be able to source a guaranteed buyer for a year, making it much easier to manage your Lightning wallet instead of the wider Liquidity ad, which would require you to find and match buyers monthly. 

Unfortunately, for now, these sales only go one way with users purchasing liquidity from Phoenix, and they cannot yet sell their liquidity to Phoenix, with peers using the wallet or other Lightning users. 

Do your own research.

If you want to learn more about the Liquidity ads, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research, check out their official resources below or review other articles and videos tackling the topics.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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