Conventional Thinking Of Profit Incentives
Before we get into the dynamic of revenue, let’s simply take into account the price facet of issues. In order to shut and open a Lightning channel you could have to transact on-chain, which incurs a miner price. This is utterly inescapable and is the bottom value to enter or depart the Lightning Network. Now take into account the routing charges collected in relation to these on-chain charges, if the routing charges are in extra of on-chain charges, you pocket a revenue and if they are much less you incur a loss. So clearly an economically rational node operator’s purpose ought to be to maximize the routing charges they accumulate in a aggressive market in order that, earlier than the top of a channel’s lifetime, they have earned extra in routing charges than they paid to open the channel and can pay to shut the channel.
As extra liquidity enters the Lightning Network on common, the quantity in routing charges nodes will accumulate will go down, as we’ve seen for a lot of node operators throughout this 12 months’s huge progress of channels and liquidity. Now it’s a bit of extra nuanced than simply “more money = everyone makes less money,” as many individuals level out, channels and their liquidity are not fairly fungible. A channel open to a big service provider everybody frequents is going to find a way to accumulate greater charges than a channel open to a random man named Bob some folks sometimes ship small funds to. But as extra channels are opened to that giant service provider, charges in these channels will development down as folks strive to competitively undercut one another on value. That’s simply fundamental economics.
The manner I’ve all the time seen the Lightning Network evolving long run is financial competitors over inserting channels between nodes or entities which have excessive transactional demand. Those that may do that affordably will earn a pleasant revenue, and people that may’t will, so to communicate, “be put out of business.” Also a final point out earlier than transferring on, clearly, on this mode of considering, as on-chain charges improve over time by necessity routing charges will improve as properly.
Nonprofit-Oriented Thinking
Now let’s take into account a routing node operator who is not involved with earnings. I’m going to take into account two subcategories right here, those that will no less than recoup their prices and those that is not going to even care about doing that.
Operators who nonetheless goal to recuperate their prices will nonetheless have to cost routing charges however, due to not caring to earn revenue on prime of that, they will likely be in a position to undercut profit-seeking routing nodes by way of charges. This will inevitably lead to such nodes attracting extra quantity than ones charging greater charges searching for revenue and eat into the income of profit-seeking nodes. Now taking into consideration the dynamic of extra liquidity dragging down income, this might, probably, if a big sufficient variety of nodes function below such a mannequin, make it far more tough (or within the excessive, probably unattainable) to earn a revenue routing transactions on Lightning.
In the case of node operators who don’t even care about recouping their prices, the identical sort of dynamic with profit-seeking nodes exists however with two main variations: The nodes “distorting” the market on this manner are truly in the long run going to incur a loss and the revenue in search of nodes due to that might truly themselves be pushed into incurring losses to keep aggressive as an alternative of simply lacking out on earnings. Obviously although, this turns into a recreation of hen within the excessive, and ultimately somebody has to blink. I don’t imagine for a second, particularly as charges go up, that somebody will simply, in perpetuity, proceed dropping cash to subsidize different folks’s Layer 2 transactions.
Rounding It Off
There are some deeper nuances I’ve ignored above simply to maintain the psychological fashions I’m describing easy, comparable to route-finding heuristics which may deliberately search for routes that cost greater charges as an indication of upper reliability, channel rebalancing to delay touching the blockchain longer, and so forth however I feel, even contemplating all of this stuff, one main dynamic stays: These are two solely totally different financial faculties of thought by way of motivations and incentives to function routing nodes on the Lightning Network. They is not going to exist in a vacuum, they will work together with one another in the identical market because the community continues rising. It will likely be attention-grabbing to see how that performs out.
This is a visitor put up by Shinobi. Opinions expressed are solely their personal and don’t essentially mirror these of BTC, Inc. or Bitcoin Magazine.
