Routing fee calculation is often confusing for Lightning Network operators, so here is a quick overview to explain how it works and how it's calculated.
As a Lightning Network node operator, you are only paid forwarding fees when a payment is forwarded successfully, as opposed to a failed forward request. The fee is calculated based on the outgoing channel. The incoming channel's fees you set on your node are irrelevant for fee calculation. Therefore, if you expect to forward many payments to a specific node, set the fees on the channel to that node according to your needs.
There are two types of fees:
Base Fee
This is the simpler fee to understand. For every single payment transaction forwarded, you receive a certain amount of satoshis (sats) that you set for the channel. For example, if you set 1 sat for the base fee and you forward 5 transactions, you will earn 5 satoshis. This fee ensures that you are compensated for the storage and processing power associated with each transaction on your node. It's crucial to note whether it's set in terms of satoshis or milli satoshis (msat). If it's set in msat, 1,000 msat is equal to 1 satoshi.
Fee Rate
This fee typically causes misunderstanding due to its denomination and the small numbers involved. Depending on the software used, the fee rate is either set in parts per million (PPM) or percentage. For the fee rate, once again it's important to note whether the fee rate is set in terms of satoshis or milli satoshis. For instance, in the popular Thunderhub application, setting a fee rate of 500 on a channel means 0.05%, and the denomination is in satoshis, not milli satoshis.
Nomenclature
When you query and set the fees of a channel in various Lightning implementations, the naming of the base fee and fee rate differs slightly.
Here is an example of a report on a channel in LND:
fee_base_msat is the base fee set in msat (milli Satoshis).
fee_proportional_millionths is the fee rate in PPM (parts per million).
CLN doesn't provide the fee rate in percentage terms.
Examples of Fee Calculation
Let's consider examples to understand how much you earn with a setting of a Base Fee of 1 sat and a Fee Rate of 500 set in Thunderhub on a channel.
Example 1: Single Transaction of 1 Million Satoshis
Base Fee: 1 satoshi per transaction = 1 satoshi
Fee Rate: 500 PPM means you get 500 satoshis per million satoshis forwarded. Thus, the fee earned is 500 satoshis.
Total: 1 + 500 = 501 satoshis fee
Example 2: Five Transactions of 200,000 Satoshis Each
Base Fee: 1 satoshi for 5 transactions = 5 satoshis
Fee Rate: 500 PPM for 200,000 sats is 100 satoshis each, times 5 is 500 satoshis.
Total: 5 + 500 = 505 satoshis fee
Handling Very Low Fees
Now, what happens if the fee is very low? Let's say the base fee is zero and the fee rate is 25 PPM, and you route 10,000 satoshis. The fee would be 0.25 satoshis. Since the smallest amount in Bitcoin is 1 satoshi, you can't earn and be paid 0.25 satoshis (or 250 milli satoshis). However, the money is not lost. If you were to route four such transactions through the same channel, the partial satoshi earnings will add up, and you will earn a single 1 satoshi (1,000 milli satoshis) eventually.
Understanding these fee structures and how they are applied will help you better manage your node and optimize your earnings from forwarding payments on the Lightning Network.
One crucial decision for a Lightning node operator is whether to open few large channels or many small ones. To assess this, we'll explore three hypothetical scenarios, each representing different channel configurations. These examples can be scaled up or down depending on the available funds, with the figures provided being solely for comparative purposes.
Scenario 1: Small Channels
Many smaller channels
Configuration: Ten channels with 1 million satoshis each.
Advantages:
High Redundancy: With ten channels, there is a greater likelihood that at least one channel will have the necessary liquidity for a transaction, ensuring almost certain payment success.
Potentially Lower Fees: With more routes to choose from there is a higher likelyhood to find a low fee route for incoming and outgoing payments.
Ideal for Small Payments: This setup is particularly suited for small transactions such as tipping, paying for content, and other microtransactions.
Disadvantages:
Limited to Small Payments: Larger payments require splitting across multiple channels, which can add complexity and potentially increase the transaction time.
Higher Opening Costs: More channels mean higher costs due to the fees associated with opening each channel, although this can be mitigated by batch channel opening.
Minimal Routing Income: Smaller channels are less likely to be used for routing, resulting in lower fees earned from this activity.
Scenario 2: Mixed Size Channels
Mix of large and small channels
Configuration: Five channels with 1 million satoshis each, and one channel with 5 million satoshis.
Advantages:
Balanced Redundancy and Capacity: This setup provides a good mix of redundancy and the ability to handle larger payments through the 5 million satoshi channel.
Versatility: Suitable for a variety of use cases, from small transactions to occasional larger payments.
Moderate Routing Income: The larger channel may be used for routing, generating some income from transaction fees.
Disadvantages:
Moderate Complexity: The mixed configuration may still face issues with liquidity in smaller channels, requiring careful management.
Variable Costs: While there are fewer channels than in the small channels scenario, the cost savings are not as significant as in the large channels scenario.
Scenario 3: Large Channels
Large channels
Configuration: Two channels with 5 million satoshis each.
Advantages:
Low Opening Costs: Fewer channels mean lower overall costs for opening and maintaining channels.
Ideal for Large Payments: Larger channels can handle significant transactions without the need for splitting payments.
Higher Routing Potential: These channels are more likely to be used for routing large transactions, generating higher fees.
Disadvantages:
Low Redundancy: With only two channels, the setup is more vulnerable to failures or liquidity issues. If one channel goes down or lacks the necessary liquidity, transactions may fail.
Centralized Dependency: Depending heavily on a few large channels can increase reliance on specific nodes, potentially leading to centralization issues.
Overall Considerations
When deciding on the optimal channel configuration, it's essential to consider several factors:
Network Connectivity: Ensure connections to both highly connected large nodes and medium-sized nodes to avoid over-reliance on centralized entities.
Frequent Connections: Establish channels with friends and businesses you frequently transact with, as direct connections can improve transaction efficiency for daily use.
Use Case Suitability: Align your channel strategy with your intended use case. Small channels are best for microtransactions, mixed channels offer versatility, and large channels are suitable for handling significant payments and routing.
Balanced Node: Ensure that you maintain a balanced node with channels that are at least partially empty on your side to receive payments and channels that are at least partially full on your side to send payments. This balance allows for smooth transaction flow in both directions. To achieve this, you may need other node operators to open channels to you. Consider using our Liquidity Swaps and Liquidity Pool services available on this site to easily and freely manage your liquidity needs.
Partner Fees: While large and well connected nodes may seem like a great option to be well connected, consider that they also typically charge more for transaction routing. Medium and small sized nodes are usually cheaper to route through.
In conclusion, there is no one-size-fits-all answer to whether it is better to open few large or many small channels on the Bitcoin Lightning Network. The optimal strategy depends on the specific needs and transaction patterns of the node operator. By carefully considering the advantages and disadvantages of each configuration, operators can tailor their channel setup to maximize efficiency, redundancy, and potential routing income.
Welcome to the next level of connectivity and functionality within LN+ — we are thrilled to introduce the LN+ Pro Membership, designed for users who are serious about maximizing their impact and visibility across the LN network.
What is LN+ Pro Membership?
LN+ Pro Membership transforms your experience by placing your node at the forefront of the LN+ platform. With this membership, your node doesn't just participate; it dominates. Whether it's on the front page, the Node Explorer, the Liquidity Swaps index, or the Liquidity Pool index, your node will consistently appear in top positions. Additionally, it will be distinguished by a PRO tag in searches and comments, instantly signaling your elevated status to the entire LN+ community.
Exclusive Features for Pro Members
Here’s a closer look at the exclusive features available to LN+ Pro Members:
Prime Node Liquidity Swaps: Start and participate in Liquidity Swaps that are exclusive to Prime nodes (explained more below) — users who have garnered 10+ positive reviews and maintain a 90%+ positive rating.
Prominent Visibility: Gain unmatched visibility by appearing at the top of critical indexes and rotating on the front page of LN+.
Ongoing Feature Access: As we continue to innovate, you’ll gain access to new features such as premium profile customization options, Pro API features, and exclusive courses offered through Layers Academy.
Support and Contribute
By choosing LN+ Pro Membership, you are not just enhancing your own node's capabilities; you are also directly contributing to the development of LN+ and the broader LN ecosystem. This is your chance to be part of something bigger — to support and shape the future of the network.
Flexible and Easy to Purchase
LN+ Pro Membership can be purchased for any number of days, starting with just one day, offering complete flexibility to suit your needs. Payments are a breeze with options including Bitcoin, either via Lightning or on-chain transactions. Remember, the longer your membership, the higher your node’s rank will be on various indexes.
Users who previously purchased the Node Highlight feature will be automatically grandfathered into the Pro Membership. This adjustment comes as we replace Node Highlighting with our new, more comprehensive offering.
Join Today and Ascend the Ranks
Don’t miss this opportunity to elevate your node and enjoy a suite of advanced features that will set you apart from the crowd. Experience the power of Pro Membership today and watch your node ascend the ranks with every passing day. Ready to upgrade? Your journey to prominence begins here, with LN+ Pro Membership.
Prime Nodes and Liquidity Swaps
While the new Prime Nodes label and Prime Liquidity Swaps are not included as a direct feature of Pro Membership, they are closely related and worth discussing in this context. As a Pro Member, you gain the ability to create what are called Prime Liquidity Swaps. These swaps are exclusively available to Prime Nodes, which are highly-rated nodes meeting specific criteria: having at least 10 positive reviews, with an overall positive rating of 90% or higher.
For instance, if your node receives 20 positive reviews and only 1 negative review, it qualifies as a Prime Node and is eligible to participate in Prime Liquidity Swaps. However, a node with only 3 positive reviews, or with 10 positive and 2 negative reviews, does not meet the threshold for participation.
The Prime Label, signifying your node's high rating, is prominently displayed on your Node Profile and is represented by a star symbol.
MicroStrategy is unequivocally bullish on Bitcoin, actively contributing to the growth of its ecosystem. Their commitment is evident through three significant initiatives they've undertaken thus far.
What has MicroStrategy done for Bitcoin so far?
Bitcoin on the Balance Sheet: MicroStrategy (MSTR) strategically allocated a substantial portion of their balance sheet to Bitcoin (214,400 BTC at the time of writing), reaping significant gains on their investment. MSTR is setting a positive example for other companies, and educating them about this ultimate store of value. Moreover, this accumulation drives up Bitcoin's price, expanding its utility by enabling larger reserves and transactions. While some critique MSTR's concentration of Bitcoin holdings, the majority of Bitcoin enthusiasts view their influence as beneficial overall.
Lightning Rewards: Recognizing the need to address underserved areas in business applications, MicroStrategy introduced the Lightning Rewards program. This initiative aims to incentivize workforce productivity by offering tangible rewards in Bitcoin. Launched just four months ago, the program utilizes the Lightning Network, known for its scalability, although its long-term success remains to be seen. Nevertheless, using Lightning as a platform was a wise idea, as LN has ample capacity to satisfy the needs of even large international companies.
Identity Solution (did:btc): MicroStrategy's latest endeavor targets another pressing issue for their clients: email spam. Addressing the significant drain on resources and security concerns posed by spam, MicroStrategy launched MicroStrategy Orange, a decentralized identity solution. Utilizing the Bitcoin blockchain exclusively, this solution aims to combat spam by storing and retrieving DID information via UTXOs on-chain. By offering tools to deploy this solution on Outlook, MicroStrategy aims to streamline email security for businesses. However, if it's important to note that if this service takes off it may use significant amount of block space.
What's in MicroStrategy's Future for Bitcoin?
What else could MSTR do for Bitcoin? Let's explore some ideas that would help the Bitcoin ecosystem and its users, including MSTR's clientele.
Massive Lightning Service Provider (MLSP): Having sufficient and reliable incoming liquidity is critical for large businesses to be able to accept LN payments. The community here at LN+, and many other services do their best to satisfy the need through various methods. MSTR is in unique position and could play a pivotal role in advancing Lightning Network adoption by becoming a Massive Lightning Service Provider (MLSP). Leveraging their substantial Bitcoin reserves, they could provide liquidity to large businesses seeking to accept Lightning payments globally. By doubling the Lightning Network's liquidity with just a fraction of their reserves (2%), MicroStrategy could significantly accelerate Lightning's growth and reliability of the network for all participants.
Bitcoin Liquid and Liquid Lightning Network: As on-chain Bitcoin transactions become increasingly expensive, MSTR could support the adoption of Bitcoin's Liquid Sidechain and help build a new Liquid based Lightning Network that is compatible with the existing Lightning Network. By providing significant Bitcoin capital, MSTR could facilitate large and fast on-chain transactions on Liquid while also enabling the ability for people to run Liquid Lightning nodes supporting cheap and rapid channel management on their mobile devices.
Bitcoin Deep Cold Storage (BDCS): MicroStrategy could enhance their Bitcoin storage security by developing a proprietary Deep Cold Storage service where clients can hold their own keys and are safe even in the event if the BDCS service were to disappear. This service would ensure MSTR can also hold their own keys independently of third parties, and offer similar self sovereignity to their clients. Making this service available to other companies and individuals would bolster Bitcoin adoption among high-net-worth individuals, large corporations, and financial institutions.
Bitcoin Development Fund (BDF): Recognizing the underfunding of Bitcoin development, MicroStrategy could establish or contribute to a robust funding organization dedicated to sustaining Bitcoin's long-term development. By providing consistent financial support, organizing events, and incentivizing developers, such a fund would safeguard Bitcoin's future and unlock its vast potential.
MicroStrategy's substantial resources present numerous opportunities to further enhance the Bitcoin ecosystem and benefit both their clients and the broader community. What other ideas do you have for MicroStrategy to explore? Share your thoughts below!
We're happy to report that Neutronpay has recently extended its payment platform to Malaysia, Indonesia, Thailand, and the Philippines, utilizing the Lightning Network to facilitate rapid, economical global transactions.
Harnessing Southeast Asia's Dynamic Market
With its young demographics and burgeoning tech sectors, Southeast Asia is a prime market for economic dynamism. Neutronpay's latest move positions it as a pivotal player in the region, offering scalable and cost-effective payment solutions that are crucial for the diverse, expanding industries across these countries.
Neutronpay now in Southeast Asia
Transforming Regional Payment Systems
By integrating the Lightning Network, Neutronpay is revolutionizing financial connectivity not only within Southeast Asia but also extending to global markets like Canada. The platform specifically addresses several key payment challenges in the region:
Introducing Bitcoin and Lightning as new payment methods, while enabling transactions in local currencies.
Providing swift, affordable international payment options for small businesses and freelancers.
Enhancing e-commerce through streamlined cross-border transactions.
Reducing costs and transaction times for overseas workers sending remittances.
Offering seamless payment options for international travelers in Southeast Asia.
Neutronpay App's Notable Features
Instant Global Transfers: Allows users to send money globally almost instantaneously, directly into bank accounts.
Business Growth: Facilitates international payments for businesses, bypassing traditional banking delays.
Merchant POS Mode: Streamlines transactions for retailers serving both local and international clientele.
Content Creators' Hub: Supports streamers and creators with LNURL, facilitating easy global payments.
Remote Work Flexibility: Ensures freelancers and remote workers receive timely payments with minimal fees.
Everyday Convenience: Simplifies daily financial tasks like bill payments, expense sharing, and online shopping.
If you examine the historical statistics of Bitcoin's Lightning Network (LN)—including node count, channel count, and total channel capacity—you will notice a decline since the first quarter of 2022. Over the past two years, it appears that LN is not only stagnating but also contracting significantly.
This contraction is surprising, especially considering the seeming all-time high popularity of LN by other metrics. A recent report by River highlighted a 12-fold increase in LN transactions in the last approximately two years. Most progressive exchanges support LN, and the others are planning to implement it soon. Nostr, a prominent decentralized social network, is entirely powered by Lightning. Moreover, merchants are reporting growth in LN payments.
So, what is happening? How can there be such a discrepancy between usage and node growth? Is LN still the future of payments on Bitcoin? Let me explain how I interpret the statistics of nodes and channel counts and why they might be misleading.
Lightning Network Channel Count and Capacity by Mempool.Space
Overexcitement in 2021
It's clear that 2021 saw massive growth, primarily driven by Umbrel's sudden popularity. Umbrel simplified running both Bitcoin and Lightning nodes on inexpensive hardware, offering a graphical user interface (GUI) over the command line and promising complete self-sovereignty. Thousands began running nodes and opening channels. However, the initial excitement faced technical challenges when Umbrel introduced multiple apps in their app store, overwhelming the underpowered devices. Long-term operation of Raspberry Pi computers occasionally proved unreliable. A small percentage of nodes failed, deterring many users from keeping their bitcoins on such devices, resulting in many Umbrel nodes going offline.
Disillusion with Routing Earnings
Many enthusiasts began running nodes and opening channels in 2021, hoping to earn significant fees from routing, despite no guarantees of high earnings from operating a Lightning node. While a few operators do earn significant income from their nodes, it generally requires managing many well-selected channels. Some operators, unable to turn a profit, also began shutting down their nodes starting in 2022.
High On-Chain Fees
Bitcoin's on-chain fees have risen sharply recently. In the early days of Lightning, channels could be opened for as little as 1 sat/vB; now, the cost often exceeds 20 sat/vB. Coupled with the increase in Bitcoin's value, channel openings have become expensive, costing around $10, compared to just cents earlier. This increase makes experimentation costly, deterring new users from opening many channels.
Network Optimization
Post-2022, many professional node operators and companies have optimized their approaches to running Lightning nodes, resulting in fewer but larger channels opened to strategically important nodes. Some U.S. companies are also regulated to open channels only with other U.S. companies, contributing to fewer channels overall.
Experimentation by Companies
In early 2022, the substantial inorganic growth in nodes and channels resulted from companies experimenting with creating nodes for their customers en masse. This approach proved costly and inefficient, leading to the closure of many of these nodes.
Private LN Networks
The statistics reflect only publicly visible nodes and channels. Anecdotally, we know that many channels are opened privately. Private channels offer advantages such as enhanced privacy and avoidance of channel "draining" through rebalancing, which is crucial for large companies needing reliable capacity on one side to serve customers. However, receiving payments in private channels can be cumbersome, requiring hints in the invoice. The private segment of the Lightning Network could be expanding rapidly, but this growth is not reflected in public statistics.
The Value of Bitcoin Increased
In recent years, the value of Bitcoin has significantly increased, meaning the existing channel capacity can carry more value in dollar terms. Consequently, there is less urgency to increase capacity. If the value of Satoshis continues to rise, the current network could meet future users' needs without adding significantly more Bitcoin to channels.
LN is Still Too Hard
Despite the ease of setting up and operating an LN node with services like Umbrel, Voltage, and natively with LND or CLN, understanding the fundamental concepts of channels and liquidity remains challenging. We need more education and better software and services to include more people.
Custodial LN is Easy
Lightning is primarily built for microtransactions, ranging from fractions of a cent to several dollars. The use cases include tipping, paying for content, and purchasing services. Consequently, many people prefer not to manage a substantial amount of value in their Lightning wallets, allowing custodial services to offer wallets (ex. Speed Wallet) that simplify node and channel management, enabling instant receipt and sending of any amount of Satoshis. However, these custodial wallets are straightforward to set up and use, but they also mean you do not control your keys or run your node, thus your node will not appear in statistics.
What the Future Holds
Lightning is clearly a highly beneficial technology that offers numerous advantages to Bitcoin users: it natively uses Satoshis as the unit of account, it is fast, inexpensive, secure, and easy to use, supporting technologies like the Lightning Address. Lightning-related tools will continue to improve, the number of enthusiasts will grow, and more companies will offer a broader range of products to cover all use cases. The usage of LN will generally increase, but despite this, we may see further erosion of node count in the next year or so due to the reasons mentioned above. At some point, the node count is expected to begin increasing again, at a steady, sustainable rate. However, just like today, a large percentage of LN users will continue to choose custodial wallets for their everyday needs.
We launched a much requested feature Today. Previously, on Liquidity Swaps you could rate the node that was committed to open a channel to you. Now, you can also rate the node you opened a channel to, since they also have a committment to keep the channel open till the end of the agreement. You can rate nodes for the time of the agreement plus a week after the swap concluded.
Navigating the Bitcoin Lightning Network can sometimes leave newcomers puzzled with questions such as "I opened a channel a few weeks ago, and now I don't have any sats on it. Where did my sats go?" or "I opened a channel some time ago, and there was 1 million sats in it. I closed it today, but I didn't get my 1 million sats back. Where is my money?" These are common inquiries that often stem from a fundamental misunderstanding of a crucial Lightning Network process: routing.
Unveiling the Concept of Routing
To unravel this mystery, it's essential to grasp the concept of routing within the Lightning Network. Routing allows the transfer of bitcoin (sats) across the network over multiple channels without requiring a direct channel between the sender and receiver. This process is similar to how internet packets travel from their origin to their destination through various nodes. Learn more about routing.
How Routing Influences Your Sats
When you deposit sats into a channel, those sats represent your side of the channel's balance. As your channel engages in routing payments for others, the allocation of sats between you and the channel's counterparty changes. However, it's crucial to understand that while individual channel balances fluctuate, the overall balance of your node, when considering all your channels, remains unchanged by routing activities alone.
Clarifying a Common Misconception
A crucial concept that often goes misunderstood is this: when you route funds, the channel that forwards the funds sees a reduction in its balance, but another one of your channels that receives the routed funds will see an increase. Thus, routing doesn't lead to a loss of funds.
A Typical Routing Scenario
Forwarding 100,000 and earning 5 sats in fees
Let's expand our typical scenario to incorporate this vital concept:
Opening a Channel: You open a channel with 1 million sats. All these sats are initially on your side.
Routing a Payment: Your channel routes 100,000 sats to another user, decreasing your balance to 900,000 sats. Meanwhile, this routed payment is received by another one of your channels, increasing its balance correspondingly.
Earning Fees: By facilitating this transaction, you earn a small routing fee (ex. 5 satoshis). This fee is added to your balance, incrementally increasing the total sats across all your channels.
Understanding the Overall Impact: Although the balance of the specific channel used for routing decreases, another channel's balance increases. Therefore, the total balance across all your channels remains the same, barring the fees you've earned, which slightly increase your total holdings.
Closing a Channel: When you close a channel, you receive the final balance of that channel, which reflects all the routing and fee earnings. If, for instance, the closing balance was 900,000 sats, this does not account for increases in your other channels.
Monitoring Your Lightning Network Activity
Monitoring your channels is key to understanding the flow of sats. With the right tools (ex. Thunderhub), you can see how balances shift between channels due to routing and how your overall balance is affected.
The Routing Benefit: A Holistic View
Participating in routing payments enriches the Lightning Network, keeping it efficient and scalable. It's a cooperative effort that, while it may initially seem like your funds are depleting, actually maintains your overall balance and incrementally increases it through fees.
Public / Private Channels
It's crucial to grasp the difference between the two types of channels on the Lightning Network: public and private.
Public Channels are open to the entire network. They appear in the network's public graph, making them visible to all participants. This visibility allows nodes to use public channels for routing payments to nodes with which they do not have a direct connection. The ability to route payments through a node depends on the availability of sufficient capacity in the necessary direction on the involved channels.
Private Channels, on the other hand, are not broadcast to the entire network. Visibility is restricted to the nodes directly involved in the channel, rendering them less prominent for routing on a broad scale. Despite this, private channels can still participate in routing payments. For routing through a private channel to occur, nodes outside the channel must be informed of its existence, typically through "routing hints" provided by one of the participating nodes.
Conclusion
Routing within the Lightning Network is a dynamic process that redistributes sats across your channels but doesn't inherently decrease your total holdings. By actively participating in routing, you not only support the network's efficiency but also have the opportunity to grow your total sats through accumulated fees. As you familiarize yourself with these principles, managing your channels and optimizing your participation in the Lightning Network becomes an engaging and potentially rewarding endeavor.
We are thrilled to unveil Layers Academy, an educational platform designed to demystify Bitcoin and its ecosystem for a rapidly growing audience eager to grasp and utilize this groundbreaking technology. Our lessons, which last between 5 and 10 minutes, are presented in an engaging video format and crafted for easy comprehension. We incorporate real-world examples and parallels to simplify complex ideas. Additionally, each lesson comes with a full transcript, offering the option to read the voiceover if preferred.
Layers Academy is structured into faculties, courses, and lessons. At launch, we offer basic Bitcoin courses, which will soon be complemented by courses on the Lightning and Liquid networks, followed by advanced courses covering all these subjects in greater detail. Each course and lesson builds upon the information presented previously, ensuring a cohesive learning experience.
After completing each lesson, you'll have the chance to gauge your understanding through quizzes. Achieving success in these assessments rewards you with accomplishments, marking your progress.
What’s in the Name?
The Bitcoin ecosystem extends beyond the code of the Bitcoin blockchain. It includes a broad array of innovations and solutions developed in layers atop Bitcoin, such as the Lightning and Liquid networks. The name Layers Academy reflects our aim to elucidate these layers for learners.
Work in Progress
We recognize our current lessons as merely the beginning. We warmly invite our community to engage actively in this educational journey. If you come across any inaccuracies or have suggestions for improvement, we encourage you to reach out via our contact form or lesson comments. Your insights, resource recommendations, or ideas related to the content are highly appreciated and will contribute significantly to enriching our academy.
A Bitcoin Lightning Network channel backup, also known as a Static Channel Backup (SCB), is a feature that allows for the on-chain recovery of Lightning channel balances in the case of data loss or hardware failure. It is a failsafe to record the state of a Lightning channel, enabling the recovery of off-chain balances. The SCB contains all necessary peer and channel information, allowing the Lightning node to send a request to force-close the channel on their end to all previous online peers.
However, it's important to note that the channel backup does not allow the recovery of Lightning Network channels, but it increases the chance of recovering off-chain balances. The backup is created and managed through the Lightning Network node, and it is essential to download a copy of the SCB file when opening or closing any channels. The backup is a critical security measure, and it is advisable to have a proper backup strategy in place to ensure the safety of Lightning channel funds.
What is a Bitcoin Lightning Network Channel Backup?
The Purpose: On the Lightning Network, payment channels exist between two individuals, allowing for lightning-fast Bitcoin transactions. A channel backup ensures you don't lose your share of the Bitcoin locked in a channel if something happens to your Lightning Network node.
What it Contains: Static (unchanging) channel information:
The channel's funding transaction
Channel capacity
Public key of the other node in the channel
Other relevant channel configuration details
What it Doesn't Contain: The current channel balance or its associated commitment transactions. This information changes often.
Types of Channel Backups
Static Channel Backup (SCB): The core backup stored as a file (often channel.backup) or multiple entries within a file. You'll need your Lightning wallet seed phrase to use an SCB effectively.
Database Backups: Lightning Network implementations save important channel information to a database. If you have a full database backup, you can restart your node without the need to use a SCB which would close channels.
How to Use a Bitcoin Lightning Network Channel Backup
The recovery process in the event of data loss is called Data Loss Protection (DLP), and its steps can vary between Lightning Network implementations. Generally:
Node Failure: Your Lightning Network node experiences a major problem (e.g., corrupted hard drive, software failure).
New Node Setup: You install a fresh Lightning Network node.
Restore Wallet Seed: Restore your 24-word wallet seed phrase. This recreates your on-chain Bitcoin wallet.
Restore SCB: You transfer the SCB file to your new node or re-enter individual SCBs. Different wallets and LN tools provide the recover option in different places. In Thunderhub for example you can find it under Tools / Backups / Recover Funds from Channels / Recover.
DLP Process:
Your new node uses the SCB file(s) to discover the public keys of nodes you had channels with.
Your node contacts your former channel partners, alerting them to your issue.
Cooperative nodes will initiate force-closing the channels, returning your on-chain balance according to the last agreed-upon state in the backup.
Important Considerations
Always Update Backups: Backup your SCB(s) whenever you open or close a Lightning channel. Outdated backups won't reflect the correct channel state.
Secure Your Backups: Treat your SCB and wallet seed with extreme care. Anyone with access to both can steal your funds, because they can close the channels and then send out the on-chain funds to their own wallet. Store them securely, with copies in safe locations.
Uncooperative Peers: In the worst-case scenario, where a channel partner becomes uncooperative, you risk losing some funds since the SCB doesn't hold the most recent channel state. This is rare, but highlights the importance of choosing reputable nodes as channel partners.
Watchtowers: In order to ensure that your peers can't cheat you consider entering a Watchtower Swap.
Thunderhub's Backup and Recovery options
Backup Strategies
Automated Cloud Backups: Popular Lightning Network wallets often have built-in features to automatically back up your SCB to cloud storage (encrypted, of course). For example, if you are running an Umbrel node, they have your channel backup and you can contact them if needed.
Manual Backups: You can periodically copy your SCB file to external drives or another computer. Different wallets and LN tools provide the link to download in different places. In Thunderhub for example you can find it under Tools / Backups / Backup All Channels / Download.
Database Backups: If your implementation uses a database, include regular backups of it as part of your strategy.
Ever wondered how Bitcoin manages to stay secure and functional? It's all thanks to a bit of mathematical wizardry called Elliptic Curve Cryptography (ECC). Let's break the concept down into simple terms. At the end of the post you will find resources to dive deeper into the subject.
What is Elliptic Curve Cryptography?
Imagine you have a magical lock that's super easy to lock but a real headache to unlock without the right key. That's basically what ECC is in the world of cryptography. It's a method of encoding data so that it's super secure. In Bitcoin, this magic helps keep your transactions safe and sound.
The Role of ECC in Bitcoin
In the Bitcoin universe, each person has two keys: a Private Key, which is your secret password, and a Public Key, which is like your Bitcoin address. ECC is the secret sauce that turns your Private Key into your Public Key. This process is like a one-way street – easy to go one way, but nearly impossible to reverse.
secp256k1: The Specific Curve Used in Bitcoin
Bitcoin uses a specific type of ECC called secp256k1. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, chose this curve for its solid balance of security and efficiency. Think of it as a specific set of rules for the cryptographic process. The '256' in its name indicates the size of the key, which makes it robust against attacks while maintaining performance.
Deriving the Public Key
Let's get a bit visual here. Imagine the ECC as a roller coaster track. Your Private Key is like your unique cart on this track. When you go through the ECC process (or the roller coaster ride), you end up at a specific point on the track – that's your Public Key. It's a fun ride, but only in one direction!
This specific point is calculated using the elliptic curve and your Private Key, ensuring that each Public Key is unique.
Graph of secp256k1's elliptic curve
Why Can’t We Reverse the Process?
You might be thinking, "Can't someone just ride the roller coaster backward and find out my Private Key?" Nope, that's the beauty of ECC. It's mathematically so complex to reverse this process that it's considered practically impossible. This is what keeps your Bitcoin wallet secure.
This complexity arises from the Discrete Logarithm Problem in elliptic curves, a problem that is easy to compute in one direction but extremely hard in reverse.
Metaphor to Understand Irreversible Calculations
A way to demonstrate a similar "one-way street" calculation, like that in Elliptic Curve Cryptography (ECC), is the process of mixing paint colors.
Imagine you're an artist with a palette of primary colors: red, yellow, and blue. You start mixing these colors to create a new, unique shade – let's say a specific tone of green. This green is created by carefully combining a certain amount of blue, a certain amount of yellow and a tiny bit of red.
Mixing a unique green color from blue, yellow, and a bit of red
If you know the formula to create your unique green, mixing it from the primary colors again is straightforward and can be done over and over precisely without much effort. This process of mixing the colors is like generating a Public Key from a Private Key in ECC. Just like you combine specific amounts of 3 colors to get a unique green, in ECC, you perform specific mathematical operations on the Private Key to get a unique Public Key.
Now, here's where the one-way street comes in: Once you've mixed the various paints into green, it's very hard for someone to look at your green and accurately separate it back into the original amounts of blue, yellow and red. They can guess it's made from blue and yellow, but they can't determine the exact proportions that were used.
Similarly, in ECC, once you have the Public Key, it's computationally infeasible to reverse the process and find out the exact Private Key. The mathematical operations (like the paint mixing) ensure that while it's straightforward to go from the Private Key to the Public Key (mixing blue and yellow to make green), it's extremely hard to go in the reverse direction (separating the green back into blue and yellow).
Efficiency of ECC in Bitcoin
One of the coolest things about ECC is how it does so much with so little. It keeps Bitcoin's transactions secure without needing a ton of data. This efficiency is a big deal because it means transactions can stay quick and wallets don't get too bulky.
ECC's ability to offer equivalent security with smaller keys compared to other cryptographic methods like RSA makes it ideal for a system like Bitcoin, where speed and efficiency are crucial.
Conclusion
There you have it! ECC is like the unsung hero of Bitcoin, working behind the scenes to keep everything running smoothly and securely. It's a fascinating blend of mathematics and technology that powers the world of cryptocurrencies. If you want to understand ECC in bigger detail, watch and read the resources below:
The Aqua wallet is the latest addition to the Bitcoin ecosystem, boasting several unique features not commonly found in other Bitcoin wallets. Below is a quick overview of its offerings:
Bitcoin Wallet
This non-custodial wallet supports full SegWit addresses (starting with bc1...), optimizing fee reduction. However, as it's not a full node wallet, users depend on third-party services for block data. While it lacks the option to connect to your own node, you can switch the blockchain explorer from the default minimalistic blockstream.info to the more popular full featured mempool.space.
Opening Screen, Main Screen, and Receiving Bitcoin Screen
Lightning Wallet
Remarkably, the Lightning wallet allows instant receiving without needing to open a channel. This seems similar to Zeus wallet's approach of opening a zero-confirmation channel. The minimum initial receiving amount is set at 1,000 SAT, with a service fee of 428 sats (approximately $0.18). The wallet, declared fully non-custodial by Jan 4, employs unclear means to facilitate this functionality, as the fee doesn't cover channel opening costs. Presently, only invoice generation is possible, with no option to set a Lightning Address. The Lightning wallet is accessible under the Layer 2 Bitcoin section.
Liquid Bitcoin Wallet
The Liquid wallet taps into the growing popularity of Liquid, a Bitcoin sidechain known for its quick one-minute block speeds and lower fees compared to the main Bitcoin chain. It offers straightforward sending and receiving capabilities and is located under the Layer 2 Bitcoin section.
USDt Wallet
The Aqua wallet comes with a built-in Tether USDt wallet, supporting the three largest blockchains:
Liquid Network: Allows native receiving with no minimum amount.
Ethereum Network: Facilitates on-the-fly conversion from Ethereum USDt to Liquid USDt, with a minimum of around $22 and a maximum of $25K. Conversion fees, if any, are unspecified.
Tron Network: Features a similar setup to the Ethereum chain.
Under Settings, the wallet supports additional assets such as INF, JPY Stablecoin, PEGx EURx.
Backup
Backup is handled via a traditional 12-word seed, accessible under Settings.
Bitcoin Chip
An intriguing feature under Settings is the Bitcoin Chip, which allows asset transfers from a poker chip-like device to the wallet via a QR code scan.
Marketplace
The wallet includes a non-functional marketplace feature, expected to offer services like Bitcoin purchases, asset swaps, bill payments, and a virtual debit card for online transactions.
User Experience
The wallet's user interface is exceptionally user-friendly, making it ideal for beginners. However, it may not be the best choice for those expecting to receive very small amounts of Satoshis (below 1,000 SAT) over Lightning. For such cases, custodial wallets like Blink or Speed may be more appropriate.
