- BitMEX’s research on the lightning network
- There are limiting factors undermining the lightning network
- The network is intended to speed up transactions and reduce transaction fees
This week, BitMEX presented research on bitcoin lightning network nodes. It showed that lightning network users can earn a 1% profit of their investment yearly; this is based on the bitcoin the investors stake on the network’s outbound channel balance.
According to the exchange, it is possible to maximise fee income through a routine fee of about 0.1 basis point, the routine fee is situated between 0.005% and 0.0015% where the nodes make payments through their outbound channels.
In the research, it stated that for the node operators to earn the fee income and receive liquidity for routing payments, they have to lock bitcoin inside the node’s payment channels. Inbound liquidity are funds owned by other network users inside the payment channels that are used to receive incoming payments whereas outbound capacity creates the necessary conditions to allow for an almost free and instant bitcoin transaction.
Challenges for the Lightning Network
There are two fees associated with the lightning node, one is the base fees which is a fixed amount charged every time a payment is made through the channel, and the second fee is the liquidity provider fee; this is not fixed but is instead a percentage of the value of the payment made. Balancing the inbound and outbound capacity presents a number of challenges to the operators such as; the operators will have to look for poorly connected lightning nodes with high payment demands, they would also have to monitor and rebalance channels to ensure there is enough two-way liquidity.
They would also be required to analyse the free market for networks, high demand, and low capacity routes. Implement a custom backup to protect the funds in case the node crashes and finally adjust both base and fee rates to maximise the income. The fact that there is no automated system capable of performing all these functions warrants for businesses to provide lightning network be set up.
About Lightning Network
The lightning network is a payment protocol for bitcoin transactions. It eliminates the need for every transaction to be recorded on the blockchain by creating a second layer where users can generate payment channels between any two users. This will enable the transactions between the two parties to be instant and at the same time reduce the transaction fees. The various transactions made between two users are then recorded on the chain as a single transaction.