This is quite a clickbaity title, but I believe what I'm going to outline here is the way forward to have more profitable routing nodes. I will avoid doxxing specific peers or giving too many exact numbers, so you are free to take from this what you want.
Presently, I believe, most of what the majority of nodes are routing are simply rebalancing events between themselves. Of course, due to the semi-private nature of the network, I don't have ways to confirm this explicitly, but the majority of larger amounts that myself and some other peers I talked to routinely route seem to point in that direction. At the time of writing, I consider everything above 50k Sats a large amount. Only occasionally does one see small amounts which are probably either micropayments or probing events. The majority of micropayments come from large hubs towards other known big nodes that accept micropayments. So you already have to be quite lucky to be the missing link between these two peers. I don't know enough about probing (other than maybe the ones from LOOP), so I will not venture on those.
Coming back to the rebalancing events, those are necessary and will always exist, but because of their closed nature within the network, they are mostly a zero-sum game. The node operators that are either more skillful or have more time on their hands to manage the channels will be the ones that are on the receiving end of the equation, showing net positive earnings, while the others will operate at a loss. There is nothing surprising about this. And if one wants to switch sides to the profitable side, we are still early enough to grow and have a profitable node, so there is nothing unfair about this. Of course, in this context, if you want to be highly profitable, the more liquidity you have, the better, but that's not what most players, I believe, are in it for at present. We mostly enjoy the experience and possibly contribute to a better payment network for the future.
All well all good, I hear you say, you haven't told me anything interesting yet. What about the clickbaity title?
Let's get to that now, I just wanted to set the premise on which I'm basing my prediction of how one can get more earnings with less active involvement.
Some time ago (here is an example of me avoiding specifics), I got lucky to open a channel with what I will call an end-of-chain node. Effectively, a node that is primarily on the receiving end of a payment. They offer a product and the consumer pays for it using lightning. Myself, I have nothing to do with the product (I actually didn't know about the specifics of the products for a long time), the only thing I do is provide liquidity to that end-of-chain node. I open a channel with them (it doesn't even have to be a very large one), and I route all the micropayments they are banking. The size of the transactions was usually of the order of 1,000 to 20,000 Sats, during busy times at a rate of 1 transaction every 2 minutes. I put a zero base fee and then would play with the proportional fee, going up as high as 1500 ppm and still routing. Not many nodes can claim active routing at 1500 ppm when forwarding larger payments. Due to the frequency of the routing events, this would add up to 2000 to 3000 Sats a day.
There are a couple of reasons this setup works so well, based on my still limited experience:
- I am the sole liquidity provider to that node. Or, to be honest, I used to be, now I am competing with someone else, and profits have gone down. But at the peak of my profits, this was the case. This is something to keep in mind for later.
- I have a private communication channel with the operator of that end-of-chain node. We can discuss and make sure we are on the same page, and also, it facilitates setting up the necessary LOOP OUT events that have to be initiated (and paid) by them to replenish my depleted, mostly one-directional channel, with them. One cannot rely on circular rebalancing, because (i) when I was their only peer no route could be found, obviously, and (ii) when I was not their only peer, circular rebalancing would just take away from their other sources of inbound liquidity.
- People who pay micropayments don't care about paying 2 to 30 sats per event, it is still a dirt-cheap transaction fee compared to the legacy payment networks. As opposed to 1500 ppm becoming quite sizeable for larger rebalancing transactions (and in many cases, one can anyhow find a cheaper route). The additional benefit from having so many micropayments routing through my node is that the peers who were sending me the payment became much more active in making sure our channels would be balanced. I barely had to take care of it anymore. Even the known liquidity sinks would start sending sats my way. It started to move organically at minimum cost and effort from my side.
I got lucky with finding this peer. They were looking for inbound liquidity and I had some on my hands that I could spare. For the stability of their business, they had enough incentive to find a few additional liquidity providers to make sure they wouldn't get hurt in case our channel ever went down or got closed in these early stages of the network. Because of these additional channels (including a very big liquidity provider), the amount of routing I get for them has gone down a lot. It comes back at times, but it's not as good as before.
So, based on this experience, what is the way forward? My goal is to reproduce the profitable setup outlined above but remove some of the pitfalls that ended up pushing me out of the game. As a check-list, these are the steps in my mind:
- Set up a second LN node (this will incur a one-time hardware cost)
- Set up a small Shopify store for which BTCPay integration is quite straightforward to gain experience (this is not the final goal)
- The second node will become the de-facto node linked to the Shopify store. Basically reproducing the role of the end-of-chain node from the previous scenario. This second node will have a channel open with my present node (and no one else). I will keep its existence secret as much as possible (maybe I shouldn't write this article then, after all~~).
- Set a high fee in the channel from my current node to the new node, why not 1500 ppm as before? I am not competing with anyone else
- Gain experience with (i) managing two nodes (ii) performing LOOP OUTs to replenish depleting channels (iii) and finally, Shopify (optionally) and BTCPay (most importantly). BTCPay could also be reconsidered for some alternative solutions out there.
- Once I have enough experience doing this for my own small business (with some dummy products), the final step comes into play... Convince friends that are running online businesses (or even offline ones) to start accepting payments over the Lightning Network. This will allow you to reproduce all the previous steps, where instead of having your own play-Shopify shop, you are helping their successful business. And you profit from the routing happening between the first and second node. Without this extra node, of course, you wouldn't be able to earn any routing fees. Also, it helps protect you from competing liquidity providers (they can always connect to your first node if (i) they want in on the game and (ii) you need inbound liquidity yourself. Your friends probably know nothing about LN, so my argument to convince them is that I will take care of everything on the payment side. And to not have money come between friends, I can find ways to make sure any LN payment gets transferred as soon as possible to their BTC and/or fiat wallet (ideally through recurring small LOOP OUTs to avoid BTC volatility issues, but experience will tell me if this is doable).
- Iterate the final step with other businesses that I don't have personal ties to. But for now, let's just start by gaining experience and talking to friends. Even though LOOP OUTs are trustless, having a degree of trust and personal connection with the business you are helping, can help avoid the "unknown-peer-pitfall" that cut short my previous experience using this setup.
Let me know what you think of this plan and if you are thinking of trying it yourself.