The Lightning Network facilitates high-frequency Bitcoin payments by taking transactions off-chain. Unlike Bitcoin's main network, where transactions are broadcasted to the entire network, Lightning payments travel directly between the sender and receiver through payment channels.
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Opening a Payment Channel: Opening a channel requires an on-chain transaction, incurring fees and taking at least 10 minutes. Since opening channels with every intended recipient is inefficient, payment channels can transmit third-party payments trustlessly. More channels lead to a more efficient network, incentivizing nodes to act as routers and charge fees for routing payments.
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Lightning Network Fees: Fees on the Lightning Network are set per peer and per channel. Nodes charge fees only when a payment successfully completed, with two types of fees:
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Base Fee: A fixed cost per transaction to cover computational power and storage.
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Fee Rate: A proportional fee based on the amount moved through the channel, expressed in parts per million (ppm).
For example, if Alice sends 1M satoshis (0.01 BTC) to Dina through Bob and Charlie, each node charges a fee and forwards the payment minus its fee.
Negative Fees and Circular Rebalances: Routing payments deplete outbound liquidity, which nodes can rebalance through circular payments. While this can be costly and inefficient, negative fees (paying for inbound liquidity) are a proposed solution that is not yet available.
Optimizing Fees: Fee prices fluctuate with market supply and demand, and there is no fixed strategy for optimal fee settings. Nodes need to adapt to market conditions to stay competitive.
Summary:
- Fees incentivize nodes to route third-party payments.
- Fees are configurable per channel and only redeemable if the payment succeeds.
- Base fees are flat rates; fee rates are proportional to payment size.
- Negative fees could eventually offer an alternative to circular rebalances..