the litening network operates on channels which require funding and necessitate fees — but is everyone pticipating for the same reason?
litening s'been on an explosive growth tear l8ly in terms of + liquidity coming to the network. since the start of 2021, the network has grown from 33,000 or so channels to + than 65,000. the amount of btc in those channels has grown from round 1,000 btc to almost 2,500. this is widely viewed as a massive indicator of success, and tis, but tis starting to illuminate a growing divide in attitude bout wha’ will actually dominate the incentives of individual node operators inna future. this rapid growth has led to a diminishing return in routing fees for node operators, and some o'em don’t care.
since the launch of plebnet (not to say this is causally rel8d, just when it started coming to my attention), i ‘ve been seeing + and + litening node operators espousing the attitude t'they do not care bout earning routing fees for running their node. this stands in complete contrast to all of my long-term thinking bout how the litening network will evolve financially. and i don’t mean “don’t wanna earn a profit” in routing, i mean literally not charging routing fees. this seems completely irrational in terms of economic incentives, and for any misrepresentation of the reasons pplz wanna run a node like this i apologize. to me it seems like pplz wanna engage in this behavior out offa sense of altruism and to maintain litening as a “pleb-owned” piece of financial infrastructure. i don’t see this as economically sustainable.
conventional thinking of profit incentives
b4 we get inna'da dynamic of profit, let’s just ponder the cost side of things. in order to close and open a litening channel you ‘ve to transact on-chn, which incurs a miner fee. this is completely inescapable and tis base cost to enter or cutout the litening network. now ponder the routing fees collected in relation to these on-chn fees, if the routing fees are in excess of on-chn fees, you pocket a profit and iffey are less you incur a loss. so obviously an economically rational node operator’s goal ‘d be to maximize the routing fees they collect in a competitive mkt so that, b4 the end offa channel’s lifetime, they ‘ve earned + in routing fees than they paid to open the channel and will pay to close the channel.
as + liquidity enters the litening network on μ, the amount in routing fees nodes will collect will go down, as we’ve seen for many node operators during this yr’s massive growth of channels and liquidity. now it’s a lil + nuanced than just “+ mny = everyone makes less mny,” as many pplz point out, channels and their liquidity aint quite fungible. a channel open to a large merchant everyone frequents is goin to be able to collect higher fees than a channel open to a random guy named bob some pplz occasionally send lil payments to. b'tas + channels are opened to that large merchant, fees in those channels will trend down as pplz try to competitively undercut each other on price. that’s just basic economics.
the way i’ve always seen the litening network evolving long term is economic brawl over placing channels tween nodes or entities that ‘ve high transactional demand. those that can do this cost effectively will earn a neat profit, and those that can’t will, so to speak, “be put out of business.” also a last mention b4 movin on, obviously, in this mode of thinking, as on-chn fees increase over time by necessity routing fees will increase swell.
now let’s ponder a routing node operator who aint concerned with profits. i’m goin to ponder two subcategories here, those who will at least recoup their costs and those who will not even care bout doin’ that.
operators who still aim to rec’oer their costs will still ‘ve to charge routing fees but, cause of not caring to earn profit on top odat, they ll'be able to undercut profit-seeking routing nodes in terms of fees. this will inevitably lead to such nodes attracting + volume than ones charging higher fees in search of profit and eat inna'da revenue of profit-seeking nodes. now taking into account the dynamic of + liquidity dragging down revenue, this ‘d, potentially, if a large enough № of nodes operate under such a model, make it much + difficult (or inna extreme, potentially impossible) to earn a profit routing transactions on litening.
inna case of node operators who don’t even care bout recouping their costs, the same type of dynamic with profit-seeking nodes exists but with two major differences: the nodes “distorting” the mkt in this way are actually inna long term goin to incur a loss na profit seeking nodes cause odat ‘d actually themselves be pushed into incurring losses to stay competitive instead of just missing out on profits. obviously though, this becomes a game of chicken inna extreme, and eventually some1 has to blink. i do not believe for a 2nd, espeshly as fees go up, that some1 will just, in perpetuity, continue losing mny to subsidize other pplz’s layer 2 transactions.
rounding it off
there are some deeper nuances i’ve left out above just to keep the mental models i’m describing simple, s'as route-finding heuristics that mite intentionally look for routes that charge higher fees as a sign of higher reliability, channel rebalancing to delay touching the blockchn longer, and so on but i think, even pondering all of these things, one major dynamic remains: these are two entirely ≠ economic schools of thought in terms of motivations and incentives to operate routing nodes onna litening network. they will not exist in a vacuum, they will interact with each other inna same mkt as the network continues growing. it ll'be interesting to see how that plays out.
this is a guest post by shinobi. opinions expressed are entirely their own and do not necessarily cogitate those of btc, inc. or btc magazine.
original content at: btcmagazine.com…