Instant Bitcoin: My First 30 Days On Lightning

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Instant Bitcoin: My First 30 Days in the Lightning

This is a journal of my Lightning experience that will be useful for any newcomer to Bitcoin or Lightning. As a disclaimer, there are many more ways to do things than I’ve shown here. There are a range of products and solutions to get started, some more complex than others. While there are certain standards and best practices for using Bitcoin and Lightning, the only way to get better is to jump wherever you feel comfortable and learn a lot on the go.

Before diving in, it is good to have an understanding of the difference between Bitcoin Layer 1 and Lightning, i.e. why Lightning exists, its trade-offs and special considerations. This post is specifically about the operation of Lightning Channels. Effective duct management can be a rabbit hole on its own, but before we understand it, let’s establish some basic concepts.

  • Read and contribute to PlebNet resources and discussions.
  • Being a node operator will come with an upfront investment but it pays off in knowledge and experience. Think long term.
  • For orientation, focus on peer selection, uptime and liquidity management.

Note that you don’t have to be a big routing node to enjoy the benefits of using Lightning. Merchants can accept Lightning payments for their business, and as an end user, you can make Lightning payments on your own terms, and that alone is reason enough to run a node.

I’m using a Raspberry Pi along with one of the well-known node starter packages. One thing I didn’t know before joining PlebNet was the importance of an uninterruptible power supply or battery backup – this is a must to avoid outages.

My primary Lightning tools so far have been ThunderHub and Balance of Satoshis (BOS). I’ve also been quite a novice to Linux, so if you’re at all so inclined, I recommend learning the Linux command line basics, as it really helps to understand what’s going on under the hood while you’re clicking a great UI.

My first channel was small with a capacity of 150,000 sat because I needed to appear first on the network chart, and it helped to keep track of the movements of opening a channel and watching the money move. My first burst of lightning felt like magic.

I set out to open up bigger channels and was careful to choose colleagues I trusted – I trust I took the time to rehabilitate their reputation in the community. My colleagues have a proven track record of being honest Bitcoin clients as well as competent node runners. Yes, Lightning is designed to reduce trust, so you should be able to communicate with strangers. However, I want to reduce the chance of costly scenarios and downtime due to node mismanagement by unchecked peers.

The routing node requires incoming and outgoing liquidity. One way to get Inbound is to do something called an out loop. Initially, I was taking out the channels one by one in order to balance the liquidity. I did it on my own tunnel so as not to bother my channel partner.

I later learned after reading the Voltage series on mentoring nodes at blog.voltage.cloud that the best way to get started is to open as many outbound channels as possible and repeat multiple channels at the same time. Lightning Station fixes all of this for you. I did an episode of several million sit-ups at once, and I’ll say this made my heart pound for a moment. In general, I try to transfer coins in smaller quantities, that way all your money is not tied up at the same time.

I’ve also used my Strike wallet to perform loops, but since the dollar sats arrived on the Strike app, I’ve suffered from exchange fees by having to convert back to bitcoin. In both cases, the cost of the rings is still noticeably small – about 20-30 basis points.

Note that I chose to repeat channel funds in order to create a balanced liquidity profile for the node. This service comes at a cost, so I plan to make free liquidity swaps and add or remove channels as needed. Iteration is initially useful for gaining introductory fluidity but it is not necessary to do it for each channel. In addition, you can always buy incoming channels and avoid technical details.

I had nine or 10 channels open when I saw my first striker and I was very happy. I have set my fees to be fairly low but sufficient to recover potential channel costs if all funds are transferred at once (see c-otto.de for a more detailed discussion of fees). While my goal was to achieve a low-maintenance node with organic flow, I certainly noticed that attackers were primarily one-way through a small number of paths. This is where rebalancing and fee adjustments matter.

During the first 30 days, a node had 26 redirect events with an average of 144ppm, which represents 60% of the node’s local liquidity. The gains were just 1,300 seated – not much, but hey, it’s satisfying nonetheless.

At a high level, costs include chain fees, routing fees, and Lightning-related service fees, not to mention the cost of hardware. The cost of the chain fee includes not only channel openings / closings, but also deposits and withdrawals to the Lightning wallet. The routing fee paid largely comes from performing loops, and the routing fee can increase the number of seats you have to move. I also made two payments to a few friends of my decade that incurred routing fees. I started a spreadsheet to help keep track of expenses in each category. This helps in reconciling the balances that the node shows on the screen. Records indicate that I paid about 29,000 sessions out of pocket after opening all the channel and its loops. Specifically, the BOS told me I spent about 4,000 reps in chain fees and more than 25,000 in routing fees.

It’s hard to be accurate because I had to try to calculate the SWATs that are devoured by the exchange fee. There has also been some initial confusion about commitment fees and channel reserves which are money you own but are not reflected in the channel’s available balance. It is essential that you get used to doing the accounting in bitcoin terms, although the order of accuracy is a personal choice.

In comparison, I paid more to run my channels than I earned in routing fees. But keep in mind that the introductory liquidity cost should be a one-time cost. Not only that, but the money in the canal can move back and forth infinitely allowing the canal to channel many multiples of its capacity over the life of the canal. I would say 25,000 seated was worth the investment in education.

My goal for the next month is to increase node capacity by 20% and see a positive net profit. Looking ahead, here are some other areas of interest:

  • Explore pooled channel opening and channel financing from cold storage.
  • How can using multiple Lightning Network wallets or nodes make liquidity management easier?
  • Try automated channel management tools.
  • Improved security, reliability, and uptime.

For help, feel free to ask questions; I and the common people would be happy to help!

This is another guest post by Tyler Parks. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.

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