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Foundational
Loop and Pool by Lightning Labs
Two complementary tools for Lightning liquidity: Loop for moving funds between on-chain and Lightning via atomic swaps, and Pool as an auction marketplace for buying and selling channel liquidity.
Transcript
Lightning Labs has created two powerful tools for managing and monetizing liquidity: Loop and Pool. In this lesson, we'll explore how these services work and how they can help node operators manage their channels more effectively.
What is Loop?
Loop is a non-custodial service that helps you move liquidity between on-chain Bitcoin and the Lightning Network. There are two main operations available: Loop Out moves satoshis from Lightning to on-chain, converting outbound liquidity into on-chain funds and creating new inbound liquidity in the process. Conversely, Loop In moves satoshis from on-chain to Lightning, converting on-chain funds into outbound liquidity by using those on-chain funds to push capacity into your Lightning channels.
Loop Out Explained
Loop Out is like "withdrawing" from your Lightning channels to on-chain. You pay Lightning Labs via Lightning, and they pay you on-chain (minus fees). As a result, your channel now has inbound liquidity where you previously had outbound. Common use cases for Loop Out include rebalancing channels without the need to find circular routes, converting your Lightning earnings into on-chain storage, and effectively creating new inbound liquidity.
Loop In Explained
Loop In is like "depositing" on-chain funds into Lightning. You send on-chain funds to a Loop address, Lightning Labs sends you sats via Lightning, and your channel now has outbound liquidity. Typical use cases for Loop In involve refilling depleted outbound liquidity, converting on-chain savings into Lightning spending power, and topping up existing channels without the need to open new ones.
Loop Fees and Economics
Loop charges fees for its services, which include a percentage-based service fee, on-chain mining fees, and the routing fees required for the Lightning leg of the transaction. Typically, these costs range from 0.1% to 0.5% plus on-chain fees. Loop is generally worth the cost when on-chain rebalancing is cheaper than failed routing attempts, when you need to move funds anyway, or when the time value justifies the expense.
Running Loop
Loop can be utilized through several different methods depending on your preference. You can use a hosted interface such as Lightning Terminal's web UI, or manage it via the command line using the loopd daemon and the loop CLI. Additionally, Loop is integrated directly into platforms like Umbrel, RTL, and other popular node management systems. For example, using the command line interface, you could issue a request to Loop Out one million satoshis with a six-block confirmation target by simply specifying the amount and confirmation flags in your command.
What is Pool?
Pool serves as a marketplace for Lightning channel liquidity, operating much like a stock exchange. In this system, nodes with available capital offer liquidity as sellers, while nodes needing channels bid for it as buyers. An auction mechanism then matches these buyers and sellers, resulting in the opening of new channels.
How Pool Auctions Work
In Pool auctions, sellers, who act as liquidity providers, offer to open channels for a premium by specifying their minimum acceptable rate and committing capital for the duration of the lease. Buyers seeking liquidity bid for inbound capacity by specifying the maximum rate they are willing to pay and choosing their desired channel size and duration. The matching process occurs periodically in batches, where an algorithm finds optimal pairs between buyers and sellers, and channels are subsequently opened once a match is successfully made.
Pool Leases and Accounts
Liquidity in Pool is managed through leases, which are temporary commitments with standard durations, such as 2016 blocks or approximately two weeks. During a lease, the seller commits to keeping the channel open, ensuring the buyer receives guaranteed inbound capacity. To participate in these auctions, users must fund Pool accounts with an on-chain deposit, which handles auction settlements and enables instant matching.
Pool Economics for Sellers
If you're selling liquidity, your revenue consists of the lease premium paid by buyers plus any routing fees earned during the lease period. However, you must consider the costs involved: your capital is locked for the duration of the lease, you pay on-chain fees for channel operations, and you face the potential opportunity cost of that capital. These rates have historically been variable, depending heavily on market supply and demand.
Pool Economics for Buyers
If you're buying liquidity, the primary benefit is obtaining guaranteed inbound capacity from quality nodes vetted by Pool, along with a time-limited commitment from the seller. The primary costs include the lease premium and your own on-chain fees. This value is generally worthwhile if you require reliable inbound liquidity on a short timeframe.
Running Pool
Pool requires an LND node as it is LND-specific, the poold daemon to handle auction participation, and a Pool account with funded on-chain deposits. You can access Pool through Lightning Terminal's web interface, the command line, or various third-party integrations.
Comparing Loop and Pool
Comparing Loop and Pool highlights their complementary roles. Loop's purpose is to move funds between layers using atomic swaps involving just you and Lightning Labs, resulting in rebalanced existing channels on an on-demand basis. Pool's purpose is to buy and sell channel liquidity via an auction marketplace with multiple participants, resulting in new channels being opened through periodic batch auctions. They're complementary — Loop manages existing channels, Pool creates new ones.
Practical Loop Strategy
In a scenario where your channel to an exchange is depleted and has no outbound liquidity, you have a few options. One approach is to perform a Loop Out from another channel, which moves satoshis on-chain and creates inbound capacity in the channel you chose. You can then use those on-chain funds to Loop In to the exchange channel or open a new channel entirely. While circular rebalancing is an alternative, it often fails, can be expensive, and is highly dependent on finding a valid route. Loop provides a more reliable alternative when direct rebalancing isn't feasible.
Practical Pool Strategy
If you run a routing node and want to earn income from your capital, you can fund your Pool account and set sell offers at competitive rates. Once auction matches occur, channels will open automatically, allowing you to earn the lease premium plus routing fees. These earnings can then be reinvested into more Pool capital to scale your operations. However, keep in mind that actual returns depend heavily on the prevailing market rates.
Risks and Considerations
Loop risks include fee estimation challenges where high on-chain fees can hurt profitability, timing risk if a swap fails at an inopportune moment, and a level of counterparty trust since you are relying on Lightning Labs. Pool risks involve capital lock-up for the entire lease duration, auction mismatch where your bids or offers might not be paired, market rate volatility, and potential on-chain fee spikes. Both tools require active monitoring and strategic management.
Alternatives to Loop and Pool
There are several alternatives to consider for both liquidity management and marketplace participation. For liquidity management beyond Loop and Pool, you might look into PeerSwap for peer-to-peer submarine swaps, Boltz for non-custodial swaps, or Sideshift for asset exchange services. When exploring other liquidity markets, options include Amboss Magma's fixed-price marketplace, private liquidity deals, or LN+ community services such as Liquidity Swaps and the Liquidity Pool. Each of these tools serves different node management needs.
In this lesson, we explored Loop and Pool by Lightning Labs — two powerful tools for managing and monetizing Lightning liquidity. Loop helps rebalance existing channels through atomic swaps, while Pool creates a marketplace for buying and selling channel liquidity.
In our final lesson of this course, we'll put it all together and examine Profitability and Node Economics — what it really takes to run a profitable Lightning node.
What is Loop?
Loop is a non-custodial service that helps you move liquidity between on-chain Bitcoin and the Lightning Network. There are two main operations available: Loop Out moves satoshis from Lightning to on-chain, converting outbound liquidity into on-chain funds and creating new inbound liquidity in the process. Conversely, Loop In moves satoshis from on-chain to Lightning, converting on-chain funds into outbound liquidity by using those on-chain funds to push capacity into your Lightning channels.
Loop Out Explained
Loop Out is like "withdrawing" from your Lightning channels to on-chain. You pay Lightning Labs via Lightning, and they pay you on-chain (minus fees). As a result, your channel now has inbound liquidity where you previously had outbound. Common use cases for Loop Out include rebalancing channels without the need to find circular routes, converting your Lightning earnings into on-chain storage, and effectively creating new inbound liquidity.
Loop In Explained
Loop In is like "depositing" on-chain funds into Lightning. You send on-chain funds to a Loop address, Lightning Labs sends you sats via Lightning, and your channel now has outbound liquidity. Typical use cases for Loop In involve refilling depleted outbound liquidity, converting on-chain savings into Lightning spending power, and topping up existing channels without the need to open new ones.
Loop Fees and Economics
Loop charges fees for its services, which include a percentage-based service fee, on-chain mining fees, and the routing fees required for the Lightning leg of the transaction. Typically, these costs range from 0.1% to 0.5% plus on-chain fees. Loop is generally worth the cost when on-chain rebalancing is cheaper than failed routing attempts, when you need to move funds anyway, or when the time value justifies the expense.
Running Loop
Loop can be utilized through several different methods depending on your preference. You can use a hosted interface such as Lightning Terminal's web UI, or manage it via the command line using the loopd daemon and the loop CLI. Additionally, Loop is integrated directly into platforms like Umbrel, RTL, and other popular node management systems. For example, using the command line interface, you could issue a request to Loop Out one million satoshis with a six-block confirmation target by simply specifying the amount and confirmation flags in your command.
What is Pool?
Pool serves as a marketplace for Lightning channel liquidity, operating much like a stock exchange. In this system, nodes with available capital offer liquidity as sellers, while nodes needing channels bid for it as buyers. An auction mechanism then matches these buyers and sellers, resulting in the opening of new channels.
How Pool Auctions Work
In Pool auctions, sellers, who act as liquidity providers, offer to open channels for a premium by specifying their minimum acceptable rate and committing capital for the duration of the lease. Buyers seeking liquidity bid for inbound capacity by specifying the maximum rate they are willing to pay and choosing their desired channel size and duration. The matching process occurs periodically in batches, where an algorithm finds optimal pairs between buyers and sellers, and channels are subsequently opened once a match is successfully made.
Pool Leases and Accounts
Liquidity in Pool is managed through leases, which are temporary commitments with standard durations, such as 2016 blocks or approximately two weeks. During a lease, the seller commits to keeping the channel open, ensuring the buyer receives guaranteed inbound capacity. To participate in these auctions, users must fund Pool accounts with an on-chain deposit, which handles auction settlements and enables instant matching.
Pool Economics for Sellers
If you're selling liquidity, your revenue consists of the lease premium paid by buyers plus any routing fees earned during the lease period. However, you must consider the costs involved: your capital is locked for the duration of the lease, you pay on-chain fees for channel operations, and you face the potential opportunity cost of that capital. These rates have historically been variable, depending heavily on market supply and demand.
Pool Economics for Buyers
If you're buying liquidity, the primary benefit is obtaining guaranteed inbound capacity from quality nodes vetted by Pool, along with a time-limited commitment from the seller. The primary costs include the lease premium and your own on-chain fees. This value is generally worthwhile if you require reliable inbound liquidity on a short timeframe.
Running Pool
Pool requires an LND node as it is LND-specific, the poold daemon to handle auction participation, and a Pool account with funded on-chain deposits. You can access Pool through Lightning Terminal's web interface, the command line, or various third-party integrations.
Comparing Loop and Pool
Comparing Loop and Pool highlights their complementary roles. Loop's purpose is to move funds between layers using atomic swaps involving just you and Lightning Labs, resulting in rebalanced existing channels on an on-demand basis. Pool's purpose is to buy and sell channel liquidity via an auction marketplace with multiple participants, resulting in new channels being opened through periodic batch auctions. They're complementary — Loop manages existing channels, Pool creates new ones.
Practical Loop Strategy
In a scenario where your channel to an exchange is depleted and has no outbound liquidity, you have a few options. One approach is to perform a Loop Out from another channel, which moves satoshis on-chain and creates inbound capacity in the channel you chose. You can then use those on-chain funds to Loop In to the exchange channel or open a new channel entirely. While circular rebalancing is an alternative, it often fails, can be expensive, and is highly dependent on finding a valid route. Loop provides a more reliable alternative when direct rebalancing isn't feasible.
Practical Pool Strategy
If you run a routing node and want to earn income from your capital, you can fund your Pool account and set sell offers at competitive rates. Once auction matches occur, channels will open automatically, allowing you to earn the lease premium plus routing fees. These earnings can then be reinvested into more Pool capital to scale your operations. However, keep in mind that actual returns depend heavily on the prevailing market rates.
Risks and Considerations
Loop risks include fee estimation challenges where high on-chain fees can hurt profitability, timing risk if a swap fails at an inopportune moment, and a level of counterparty trust since you are relying on Lightning Labs. Pool risks involve capital lock-up for the entire lease duration, auction mismatch where your bids or offers might not be paired, market rate volatility, and potential on-chain fee spikes. Both tools require active monitoring and strategic management.
Alternatives to Loop and Pool
There are several alternatives to consider for both liquidity management and marketplace participation. For liquidity management beyond Loop and Pool, you might look into PeerSwap for peer-to-peer submarine swaps, Boltz for non-custodial swaps, or Sideshift for asset exchange services. When exploring other liquidity markets, options include Amboss Magma's fixed-price marketplace, private liquidity deals, or LN+ community services such as Liquidity Swaps and the Liquidity Pool. Each of these tools serves different node management needs.
In this lesson, we explored Loop and Pool by Lightning Labs — two powerful tools for managing and monetizing Lightning liquidity. Loop helps rebalance existing channels through atomic swaps, while Pool creates a marketplace for buying and selling channel liquidity.
In our final lesson of this course, we'll put it all together and examine Profitability and Node Economics — what it really takes to run a profitable Lightning node.
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Loop and Pool by Lightning Labs
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