Earlier this year I decided to start running a Bitcoin Node.
I wrote about it in an earlier letter.
Some of the reasons I listed were altruistic in nature, but in this post I am going to talk more about how you can earn bitcoin with your node. I ultimately never want to sell my bitcoin, so then what is the point of having it in the first place? Well, one of the ways to make use of bitcoin is by supplying liquidity to the lightning network. You can get your Bitcoin to work for you and produce an income. This is by no means a straightforward process, and results vary wildly.
One prominent bitcoiner named Alex Bosworth tweeted about his lightning nodes producing $30k worth of income this year alone. I’m intrigued by this enough to start building out my own set of lightning channels in hopes of generating a similar income.
How to Build a Profitable Lightning Node
There are a few ingredients that go into building a profitable lightning node.
The actual hardware [ resource ]
An Ample Amount of Bitcoin
Time and Knowledge
The first two things are relatively simple to acquire. The third however is where the rubber meets the road so to speak. There is not a set formula for building, and managing lightning nodes. A lot of digging on the internet has to be done in order to figure out the best way to start building your own lightning infrastructure. That is what I hope to do with this letter.
How Much Bitcoin Do I Need?
To get started, you only really need $50 worth of bitcoin. Say around 100,000 Sats. To be profitable though, you will need a whole lot more. That is because the way you become profitable is by routing others’ payments through your node. Your node may be chosen to route a payment based on a variety of factors.
Connectivity: Whether or not your node is connected to the destination node
Fees: How much does your node charges in fees to route a payment
Liquidity: Whether or not your node actually has the liquidity available to route the payment
So obviously it is good to optimize your node along these three dimensions, but there is a lot of leeway and guesswork. You can have a highly connected node with lots of liquidity, but if you’re charging 10,000 satoshis to route payments through your node, then no one will choose your node. The reason being that it would become far too expensive to route payments through your node which would defeat the purpose of using the lightning network.
How to Connect to Other Nodes
I am currently using Umbrel to manage my Bitcoin Node. Umbrel comes with a pretty simple interface for opening and closing lightning channels. Additionally, it has the capability of hosting other lighting management tools like ThunderHub, and RideTheLightning. Both of the aforementioned tools are awesome for managing lightning nodes. The basic Umbrel interface looks like this.
There are three inputs required to open a lightning channel with Umbrel. Other interfaces will provide a much more complex set of controls and options.
The address of the node you’re connecting to (pubkey@ip:port)
The size of the channel in Sats or BTC
The fee for opening the channel
Clicking the Open Channel button will automatically connect to the peer (lightning address) and open the lightning channel with them.
Setting up nodes really is that simple. Having a profitable node means connecting to dozens of nodes from a variety of geographic locations. You ultimately want to increase the chances that your node is connected, be in close proximity to the destination address, and charge the least to route through you.
Scaling Your Node
In order to get serious about having a profitable lightning node, you need to start considering active management of your node. That means balancing your channels, connecting to high-quality peers, and making sure your node doesn’t ever go offline.
I stumbled across a really cool tool while experimenting with the lightning network last week. It is called lightningnetwork.plus. It allowed me to connect with random lightning network users across the internet and form a swap triangle with them.
Rather than finding people to scale my node with, I can form channels with anonymous people on the internet. In the above image, I am Anonymous1851 (A). The idea is that I open a channel with B, and B opens with C, and C opens with me (A), thus forming a triangle of channels. Forming channels like this helps the lightning network scale to be able to handle a global load of transactions.
When the lightning network has tens of thousands of nodes with tens of thousands of BTC on them it will be able to handle millions of transactions per second. This is ultimately the goal and purpose of the lightning network, and I intend to profit from this use case.
My Offer to Readers
Reach out to me directly, or comment on this letter with your lightning node address. I will open a 100,000 sats channel with you. I will encourage you to do the same so that we have a balanced channel!
Let’s Form Swap Triangles
If I get enough people that reached out to me wanting to set up channels, I will facilitate the setting up of swap triangles between myself and you. That way I can help each of you build, and scale your lighting nodes. Ideally, we will have a call and work through the process together.
Looking forward to building the payment network of the future with you! Here are some additional resources for learning about the lightning network.