Introduction
Few days ago I was talking with one of my "padawans" about how he is using his LN wallets. And I discovered a mistake he's doing: using his LN wallets as holding wallets not as spending wallets (as I told him to do).
LN liquidity is a very delicate subject that many new BTC LN users still do not grasp it entirely. And here is a very good guide about LN liquidity by Bitcoin Design team that I want you all to read and bookmark it.
So I will write here what I've explained (again) to him, so other new users will do it right and understand better how this LN liquidity works.
We are talking here ONLY about private LN nodes / channels using well known apps like: Zeus, Blixt, Electrum, Breez, Phoenix, Green, Bitkit, Alby Hub. Those were the user is opening private channels and manage them.
We are NOT talking about PUBLIC routing nodes, those are another story.
Basic recommendations
First thing first and you should always remember this: the rule of 3 levels stash
- onchain (cold) wallets are for holding long term
- cache wallets (onchain and LN) are for coin control, managing liquidity, nodes etc.
- LN wallets are for SPENDING. LN is THE payment network for Bitcoin network (onchain).
In other words, put in your LN wallets enough sats just for your regular spending.
Small analogy
Think about a LN channel as a "credit line" with your local bar. You put an amount of money in a box (LN channel), that both of you have control, but is deducted from it ONLY when you consume some beers in the bar. So you will open that channel only when you know for sure you will go in the next days to consume some beers.
The box content cannot be taken, only if both of you put a key to open it. Inside each of you will find his own balance, if you decide to open the box and take your part. That is the "closing channel" operation.
In any moment each of you will know the balance of the box (channel).
But think about this situation: you were the one depositing first an amount of sats as a "credit line" into that bar. But in time the sats are changing the owner. For you, as a consumer is not a problem, you can refill it anytime with more sats. Also the bar owner can move sats from that box, when are too many on his side, into another box (channel) or outside (onchain) using a swap. But can do that ONLY when you are refilling that channel with more sats (also from a swap).
The tricky part comes when you, the consumer, already consumed let's say 90% of that channel and forget about it, months and months. That is a problem for the bar owner... because now he have some funds stuck in a channel that is NOT moving, is not creating any business flow for him that generate revenue. So will be forced to close that channel and redeem his sats and returning you the remaining sats.
In other words, if you do not have a constant movement of funds with that channel, and most of the funds are on THEIR side, you put a lot of pressure on their liquidity. As business they cannot use these sats to buy more merchandise and stock, until they close the channel and redistribute the capital.
Read here also one of my old posts explaining LN with another analogy: #552822
What you should do as a regular LN private user (not public router)
I would recommend these general steps:
- Use several LN wallets, not just one, spreading your liquidity on few channels, I would say 2-3 channels per wallet/node. No need for more.
- Do not open tiny channels like 10k-20k-50k-100k. Open like min 500k-1M-2M per channel. Depends also of your spending habits, if you have large amounts moving or small amounts. Think in how much a channel can handle a payment of yours, in and out.
- Try to have each LN wallet for a specific spending habit (one for zaps, tips,small donations, one for buying beers, groceries, one for buying sats from exchanges, one for swaps etc as you desire).
- Always move around funds from those channels ! Do not keep them with more than 50% of the balance on the peer side.
- If you know that will not use a depleted channel anymore, but you hope that someday (you don't know when) you will use it to receive more sats, better just close it and buy an inbound channel on the fly from many other LSP that are already offering on the fly inbound channels. If you already bought such "inbound channel" and you have a contract for 6 months or 1 year with the LSP, you better use it in this period.
- If you do not have enough spending in a certain period of time, just move around funds between your own LN wallets. Yes, I know this have a cost in fees. But if you want to keep your channels alive, you must move funds. Otherwise you will get closed.
- If you are just stacking slowly and you do not have enough sats to move to a cold onchain wallet, read the following guide here.
FINAL REMINDER
LN CHANNELS (private) are not for long term stacking, are for SPENDING.
More stas flowing = generate more fees, routing nodes are happy and keep providing good routes = LN is flourishing and create slowly a Bitcoin Circular Economy
