BitMEX Report: Economics of Running a Bitcoin Lightning Network Node


In its latest report on Lightning Network, BitMEX Research examines the routing fees and the financial incentives for the node operators to provide liquidity. It further states that on running the most profitable fee bucket, the network participants can earn 1 percent yearly investment yield based on the bitcoin staked on the outbound channel balance.

Making Your Node Profitable

For the 0.005% to 0.0015% fee rate bucket, the team reported the fee incomes is maximized with the routing fee of about 0.1 basis points. It has also been revealed that

“the highest annualized investment return achieved in the experiment was 2.75%, whilst the highest fee bucket investment return was almost 1%.”

In order to earn free income and routing payments, liquidity is provided by Lightning node operators by locking up capital that is BTC inside the payment channels.

Talking about two types of channel capacity, Inbound liquidity is basically the funds inside the node’s payment channels. These funds are owned by other participants and can be used to receive incoming payments. In contrast outbound capacity is to make outbound payments where the funds are owned by the node operators.

To balance the inbound/outbound capacity, BitMEX shares, the node operators may need to do a lot of work that involves, adjusting both fee rates an the base fee, analyze the free market that is the high demand low capacity routes that one is targeting and looking for the poorly connected nodes such as new merchant. One also has to constantly ensure that there is sufficient two-way liquidity while having a custom backup solution in case the node machine crashes.

Currently, there are no automated systems to perform these functions but there could be the possibility of a specialist business. It has also been mentioned that the investment return does not look compelling yet, as the network is its formative stages, however, they do

“see potential merit in this business model.”

Scaling & Challenges

When it comes to scaling, the team reports, it can “easily scale to many multiples of Bitcoin’s current on-chain transaction volume,” that too without having any issues with economic fee market cycles. However, the report also examines the challenges the lightning node operators would face if the network started scaling.

The report argues that the traditional financial conditions would have a greater impact on the fees than the technical aspects of routing issues. It further shares that the low barriers to entry into the lightning fee market could mean, the balance would favor low fees and users instead of investment returns for liquidity providers.

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