Earning Routing Fees

Welcome to Course 7: Earning on the Lightning Network! In this course, we'll explore how to turn your Lightning node from a cost center into a potential revenue source. Let's start with the most discussed earning opportunity: routing fees.

What Are Routing Fees?

When you route a payment through your node, you can charge a small fee, meaning every successful forward earns you satoshis. To understand how it works, imagine Alice wants to pay Dave, and the route goes from Alice to you, and finally to Dave. In this scenario, you forward the payment and keep a small fee, which represents the difference between what you receive and what you forward. This is the fundamental earning mechanism for Lightning node operators.

Fee Components

Lightning routing fees consist of two distinct parts. The base fee is a flat amount charged per payment, typically measured in millisatoshis; for instance, a thousand millisatoshis equals a one-satoshi base fee per routed payment. There is also a fee rate, or proportional fee, which is a percentage of the total payment amount. This is often expressed in parts per million, where one ppm equals 0.0001 percent; meaning on a one-million-satoshi payment at one ppm, you would charge a fee of one satoshi. Together, your total fee is calculated as the base fee plus the payment amount multiplied by the fee rate.

Setting Your Fees

You can control your fees per channel through several methods. If you prefer using the command line with LND, you can use the `updatechanpolicy` command to set specific base fees and fee rates for a particular channel point. For a more visual approach, user interfaces like ThunderHub and RTL allow you to adjust fees easily through a graphical interface. Additionally, you can utilize automation tools like `charge-lnd` to implement dynamic fee adjustments based on the current state and liquidity of your channels.

Fee Strategy Basics

Fee strategies generally fall into three categories. Low fees attract more traffic but offer lower margins, which is effective for building a reputation and works well for nodes in well-connected positions. High fees result in less traffic but offer higher margins per payment; this strategy is sustainable for unique routes, though setting fees too high may result in zero traffic. Dynamic fees adjust based on current conditions, allowing you to charge higher fees when a channel is depleting fast and lower fees when it is underutilized. Ultimately, there is no single "right" fee, as the best approach depends entirely on your node's position and your specific goals.

What Affects Routing Volume?

Your network position matters — are you positioned between high-traffic nodes? The quality of your channel partners is crucial, as well-connected peers bring more routes. Channel capacity determines whether you can route larger payments. Reliability is essential, since nodes with good uptime get more traffic. Fee competitiveness plays a major role, as cheaper routes win more traffic. Finally, liquidity balance enables your channels to route bidirectionally.

Realistic Fee Income Expectations

Let's be honest about routing income: Most nodes earn little, as the median routing node earns minimal fees. Top nodes earn more, with a small percentage of nodes handling most routing. The business is capital intensive, requiring significant capital for meaningful income. This is not passive income — it requires ongoing management and optimization. Finally, income is variable and fluctuates with network activity.

The Math of Routing Profitability

To put these numbers into perspective, consider an example where you have ten million satoshis, or zero-point-one Bitcoin, of capital deployed. If you charge an average fee of ten parts-per-million and achieve a monthly routed volume of fifty million satoshis, your monthly fee income would be just five hundred satoshis. This works out to an annual yield of approximately zero-point-zero-six percent on your capital, and that's before accounting for any rebalancing costs. This illustrates why routing alone rarely generates significant income for small operators.

Improving Your Routing Position

Seek better peers by connecting to high-volume nodes like exchanges and popular services. Focus on strategic positioning to bridge poorly connected network regions. Increase your capacity through larger channels that can handle larger payments. Prioritize reliability by maximizing uptime. Practice careful balance management to keep channels able to route in both directions. Finally, optimize your fee strategy to find the sweet spot between volume and margin.

Monitoring Routing Performance

To effectively monitor your routing performance, you should track the count and volume of payments routed, total fees earned, and any failed routing attempts, along with the reasons for those failures. It is also important to keep an eye on channel utilization and rebalancing costs. There are several tools available to help with this, including the LNDg dashboard, ThunderHub statistics, custom tracking scripts, and Balance of Satoshis reporting.

Common Routing Mistakes

Setting fees too high results in zero traffic, which means zero income. Conversely, setting fees too low depletes channels without adequate compensation. Connecting to poor peers who are inactive or poorly connected wastes capital. Ignoring rebalancing costs can lead to situations where the cost of rebalancing exceeds the fees earned. Overcommitting capital means locking funds that generate poor returns. Finally, expecting passive income leads to disappointment, as routing requires active management.

Is Routing Worth It?

For most people, routing for profit alone doesn't make sense. But routing has other benefits: You contribute to the network by helping it function. You gain deep learning and understanding of Lightning. Your own connectivity and payments work better. There's a philosophical benefit in supporting decentralization. The combined value of routing income plus these other benefits may be worthwhile.

Advanced Routing Strategies

We'll cover more in Course 8, but consider fee automation through tools that adjust fees dynamically, pathfinding positioning by connecting strategic gaps in the network, liquidity provision by selling inbound capacity (covered in the next lessons), and hybrid approaches that combine multiple income streams from your node.

In this lesson, we've learned about routing fees — how they work, realistic expectations, and factors that affect profitability. Routing can contribute to earning, but rarely generates significant standalone income for small operators.

In our next lesson, we'll explore Charging for Channel Opens — selling your liquidity directly to those who need it.