This is a journal of my experience with Lightning, useful for Bitcoin or Lightning beginners. As a disclaimer, you can do things in more ways than I have shown here. There are many different products and solutions to get you started, some of which are more complex than others. There are specific criteria and best practices for using Bitcoin and Lightning, but the only way to get better is to dive wherever you feel comfortable and learn more as you go.
Before jumping in, it’s a good idea to understand the differences between Bitcoin Layer 1 and Lightning: why Lightning exists, its own trade-offs, and special considerations. This post is specifically related to working with the Lightning channel. Effective channel management can be a rabbit hole in itself, but before we understand it, let’s establish some important concepts.
- Read and contribute to PlebNet’s resources and discussions.
- Being a node operator comes with upfront investment, but it benefits your knowledge and experience. Think in the long run.
- When it comes to routing, focus on peer selection, uptime, and liquidity management.
Keep in mind that you don’t have to be a large routing node to enjoy the benefits of using Lightning. Merchants can accept Lightning payments for their business, and as an end user, they can make fast Lightning payments on their own terms. That’s a good reason to run a node.
I’m using the Raspberry Pi with one of the well-known node starter packages. One of the things I didn’t know before joining PlebNet was the importance of having an uninterruptible power supply or battery backup. This is a prerequisite for avoiding outages.
My main Lightning tools so far have been ThunderHub and Balance of Satoshis (BOS). I was also completely familiar with Linux, so if you are interested, I recommend learning the basics of the Linux command line. This helps you understand what’s happening inside when you click on the flashy UI. ..
My first channel was a small channel with a capacity of 150,000 sat because I had to get on the network graph first. This helped me experience the movement of opening a channel and watching the money move. My first Lightning payment felt magical.
I opened a larger channel and carefully selected trusted peers. Trust in the sense that you have taken the time to evaluate your reputation in the community. My companion is an honest bitcoiner and a proven node runner. Yes, Lightning is designed to minimize trust, so you should be able to connect with strangers. However, we want to reduce the potential for costly scenarios and downtime due to inadequate node management by unexamined peers.
Routing nodes require both inbound and outbound liquidity. One way to get inbound is to do something called a loopout. Initially, we looped out channels one at a time to balance liquidity. I did it at my own expense so as not to bother my channel partners.
Later, after reading the Voltage series of routing nodes in blog.voltage.cloud, I learned that it is a better way to open as many outbound channels as possible and loop out multiple channels at the same time. The lightning terminal understands all this for you. I looped millions of sats at a time, which was a moment of heartbeat. In general, I try to move a small amount of coins. That way, not all funds will be bound at the same time.
I also ran a loopout using my Strike wallet, but Sat arrived in the Strike app in dollars and had to be converted back to Bitcoin, resulting in an interchange fee. In either case, the cost to loop out is still very small, about 20-30 basis points.
Note that we chose to loop out the channel funds to create a balanced liquidity profile for the node. Due to the cost of this service, we plan to do free liquidity swaps and add or remove channels as needed. Loopouts are initially useful for bootstrapping liquidity, but otherwise they don’t have to be done for all channels. In addition, you can avoid technical details by simply purchasing an inbound channel at any time.
I had 9 or 10 channels open when I saw the first forward go through, and I was ecstatic. I have set the charges fairly low, but I may be able to recover the channel cost if all the funds are transferred at once (see c-otto.de for price details). My goal is to have a low maintenance node with an organic flow, but I’ve certainly noticed that forwards are one-way, mostly via a few routes. This is where rebalancing and price adjustments become important.
During the first 30 days, the node had an average of 144ppm and 26 forwarding events, which is equivalent to 60% of the node’s local liquidity. The revenue was only 1,300sat, not so much, but still satisfactory.
Roughly speaking, costs include chain fees, routing fees, Lightning-related service fees, not to mention hardware costs. The cost of the chain fee includes not only opening and closing channels, but also depositing and withdrawing to and from your Lightning wallet. The routing fees paid come primarily from performing loopouts, and routing fees can pile up more soil than you have to move. Also, the node paid a few friends twice and incurred a routing fee. We have created a spreadsheet to help you track expenses in each category. This helps to adjust the balance that the node is displaying on the screen. Records show that after all channels were open and looped, I paid about 29,000 sat from my pocket. Specifically, BOS says it has spent about 4,000 sat on chain charges and over 25,000 on routing charges.
It’s hard to say exactly because I had to explain the soil that was eaten up at the interchange fee. There was also the first confusion about commit fees and channel reserves, which are the funds you own but are not reflected in the available channel balances. The order of precision is a personal choice, but it is very important to get used to accounting in Bitcoin terms.
By comparison, I paid far more soil to get the channel up and running than I earned from routing fees. However, keep in mind that the cost to bootstrap liquidity should be a one-time cost. Not only that, the funds within the channel can travel indefinitely, allowing the channel to route multiples of its capacity over the life of the channel. I think 25,000 Sat was well worth the investment in education.
My goal for next month is to increase the capacity of the node by 20% and make a positive net profit. In the future, these are some more areas of interest.
- Find out about batch channel opening and channel funding from cold storage.
- How easy is liquidity management with multiple Lightning Network wallets or nodes?
- Try an automatic channel management tool.
- Improves security, reliability and uptime.
If you need help, feel free to ask a question. plebs and I will be happy to help!
This is a guest post by Tyler Parks.The opinions expressed are completely unique and are not necessarily BTC Inc or Bitcoin magazine..