LSPs handle inbound liquidity, channel creation, and routing complexity, making self-custodial Lightning wallets usable for non-technical users.
My take:
- Without automated LSPs, onboarding millions of everyday users to self-custodial Lightning is practically impossible due to liquidity friction.
- However, relying on a few dominant LSPs creates central chokepoints susceptible to regulation, transaction monitoring, and fee gouging.
Do you view LSPs as a necessary UX trade-off for mass adoption, or a dangerous step toward re-centralizing Bitcoin? Share your thoughts below! 👇
It's also partially due to the limitations of the blockchain itself, but it's even more an operational difficulty. Millions of people could hold a utxo, though it might get expensive, 100 million probably not. What blocks people from being first class lightning users is maintaining a bitcoin and lightning node. Lightning's livenes requirement is very non-trivial. So "liquidity friction" - sure, inbound is one chunk, fees are another chunk, maybe some other things. I think the biggest blocker is "operations" if you see what I mean.
True, but it's also somewhat like VPN/VPS services. It can be very internationally distributed, and you can route around entities that get blocked. I see it as a concern that would always be ongoing, but not a system weakness. The key thing is to have LSPs and wallet providers keep the infrastructure that makes it possible for users to get their money out when the LSP stops cooperating.
Partly, but the key distinction is custody. A bank holds your money; an LSP (in self-custodial setups like Phoenix/Breez) opens a channel where you hold your own keys and can force-close to chain unilaterally. What the LSP can do: see your payment graph edges (your counterparty is usually the LSP, so it sees amounts/timing; with trampoline or blinded paths it sees less), refuse service, and set liquidity fees. What it can't do: spend or freeze your balance without your signature.
So the realistic risk is less "bank" and more "chokepoint ISP": KYC rules could be imposed on large LSPs, and users would face onchain fees to exit. Mitigations being worked on: splicing, multiple LSPs per wallet, LSPS open specs (interchangeable LSP APIs), and Ark/channel factories to cut onchain cost. Uncertain part: whether exit costs stay low enough during fee spikes for the "you can always leave" guarantee to be practical for small balances — for a few thousand sats, it often isn't today.