A Bitcoin Lightning Node is a singular node set up to process Bitcoin on the Lightning Node, which is a layer 2 (because it sits on top of the bitcoin blockchain) payment protocol. It was designed to make payments faster so users didn’t have to worry about block confirmation times. It’s one of the solutions offered to deal with the issue of bitcoin scalability. It’s a peer to peer network largely used for micropayments.

Bitcoin nodes connect to the network to help facilitate faster and cheaper payments, and as more nodes are set up the network grows, which allows bigger transactions to more users.

How do Bitcoin Lightning Nodes work?

The way it works is not dissimilar to how a tab works at a bar. Two participants in the network transact but do not send these transactions to the blockchain, meaning they aren’t bogged down with the time it takes and the fees associated.

Like in the bar tab, the payment isn’t finalized until later, which saves the bar owner from running your card on each drink. The network has a number of bidirectional channels set up, but does not rely on every node being connected. If two nodes aren’t connected they can piggy back off a node they are connected to. This is all possible due to a blockchain readable smart contract script that enforces payments from intermediary nodes. This system makes it possible to find a path across the network to the desired recipient of bitcoin without needing to trust the nodes along the path.

The two participants’ channel is a multi-signature address, meaning both users must both agree for bitcoin to move. One of the participants funds the channel, if the other party for any reason disappears there is a transaction signed before the funding transaction that refunds the money to the party that funded the channel.

The other complication that could occur is if one of the participants pushes an older revoked transaction (that was in their favor) to the blockchain. The way the Network handles this is that the non-offending party can punish the cheating party using a secret phrase that is generated with the newest transaction. This secret phrase gives the victim the offending parties balance as well as their own. There’s a bit more logic that stops a party from using this punitive tool unfairly but it gets fairly complicated. Suffice it to say the creators of the network have found a way to keep the network running equitably. 

What’s the cost of setting up a node?

In short it’s about $250-$300 depending on the gear you buy. 

You’ll need a Raspberry Pi (an external hard drive sized computer.) which ranges from $40-60 depending on the version. Also a Raspberry Pi case similar to hard drive enclosure.

You’ll also need a storage device like a solid state drive 1TB and the enclosure (to plug your power source and other USB’s into.) If you want to run software that limits your need to code and connect to the network you’ll also need a 16GB MicroSD card.

Finally, an Ethernet cable

The process of setting up a node is extensively covered, but essentially requires plugging your Raspberry Pi into your router and downloading software to make the SD usable with Umbrel which is by far the easiest software to set up a network.

How much can you make?

It’s a really good question, the answer is it really depends on how actively you manage your node. It depends on how much you route. For example, if you route 100,000 worth of transactions, you could make around $250 for a 0.25% fee. Ultimately you as the node will decide the fees, but if they’re too high nobody will use your node. If you’re active and have decent liquidity ($10000s) some users have been able to make anywhere from $100-$4000 a month. However, many Reddit users also talk about making nothing or even running at a negative.

Is it worth it?

The answer is on you, if you:

• You have the time and energy to actively, on a daily basis, manage your node.
• Believe the value of bitcoin will increase.
• Have capital (at least in the thousands) you’re ok investing and leaving the network to help with liquidity.

Then it’s not impossible to make hundreds or even thousands a month. The real question is, is it worth your time? Or are you better off just buying crypto and holding on to it?

Alex started Clara (clarafinds.com) a site to compare fintech apps to help people and businesses understand all the new money saving tools that are revolutionizing finance. They love to write, travel and connect with new people.

Author

Alex started Clara (clarafinds.com) a site that compares fintech apps to help people and businesses understand all the new money saving tools that are revolutionizing finance. They love to write, travel and connect with new people.

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