A quick Google Trends search reveals that search queries for the term ‘passive income’ have increased two-fold over the past couple of years. It’s fair considering the increasing number of youth looking to supplement their income in an inflationary economy.
One such source of passive income among many others is running Lightning Nodes. We’ve heard about generating a cash flow using Bitcoin mining, but what is a lightning node and can it act as a source of passive income?
What Is The Lightning Network?
With the largest market cap ($400 billion as of July 2022), Bitcoin is the most vastly used store-of-value digital asset. Several major companies like Tesla hold BTC on their balance sheets. Michael Saylor’s Microstrategy has over 130,000 BTC! But is this the shape Satoshi Nakamoto envisioned his/her brain child would take?
The Bitcoin whitepaper touts it to be ‘a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.’ Though Satoshi created it as a method of payment, BTC isn’t often used for buying and selling things (yet). This is partly because the regulations are still unclear in most countries, and also because of technological limitations, particularly scalability.
The Bitcoin blockchain is secured by the Proof of Work consensus mechanism where miners compete among each other to solve complex mathematical problems to mine blocks that store encrypted data. As a result, the Bitcoin blockchain has a limit of 7 transactions per second (TPS). This makes the Bitcoin blockchain extremely slow, making it impossible to process the millions of transactions that take place around the world. This is where the Lightning Network comes into play.
The Bitcoin Lightning Network is an additional layer that was added to the Bitcoin blockchain. It permits off-chain transactions, or exchanges between parties outside the Bitcoin network. The second layer is made up of various payment channels between parties or Bitcoin users who can send and receive payments from one another. By managing transactions outside of the blockchain mainnet (layer one), layer two increases the scalability of blockchain applications while still utilising the mainnet’s strong decentralised security features.
Read about: What is a Blockchain Layer?
By transacting and settling off-chain, the Lightning Network charges a much lower fee. It also enables new use cases like instant micropayments that can resolve the age-old question of “can you buy coffee with crypto?” This technology also speeds up processing time and lowers the cost associated with the Bitcoin blockchain.
Read about: Blockchain Technology
What Is A Lightning Node?
Before we understand what a Lightning node is, it’s imperative to understand what a node is. Node software tracks the most recent blockchain data by connecting to the blockchain network. Its major objective is to record every transaction on the blockchain network, making it transparent, decentralised, and immutable.
A Lightning node is not much different. It’s a piece of software that links to the main blockchain network and the Lightning Network, itself. It’s different from the nodes on the Bitcoin network in many ways. As a primary function, Lightning nodes only verify transactions on the Lightning Network and not the main blockchain.
How Does The Lightning Network Work?
Say you want to buy some coffee from your local coffee shop and want to pay in Bitcoin. While the transaction that you are required to make isn’t significant, chances are that your transaction will take hours to process due to Bitcoin’s low TPS. Additionally, you’ll also have to pay a network fee which would probably be more than the price of your coffee.
With the Lightning Network, you can open a channel with any other party, in this case, a coffee shop. Everytime you make a purchase via the channel, the transaction gets recorded. And since this doesn’t take place on the Bitcoin blockchain, the process is instantaneous, and possibly free! Once the Bitcoin deposited by you on the channel gets exhausted, you can add more Bitcoin or close the channel. Once the channel is closed, all these transactions are bunched up together and uploaded to the Bitcoin blockchain.
The Lightning Network creates a smart contract between two parties. The terms of the agreement are written into the contract at creation and cannot be changed. When the conditions of the contract are satisfied, such as when a consumer pays for a coffee, the contract automatically completes without the need for a third party. Once a transaction has been validated in a payment channel, the Lightning Network anonymizes it. Nobody can see the specific transactions that make up the value transfer; they are all visible together.
How To Set Up A Lightning Node And Earn From It?
Running a Bitcoin Lightning node requires a Lightning-compatible wallet, a certain quantity of Bitcoin to fund your Lightning channel, and cash to purchase the necessary hardware.
Keep in mind that Lightning nodes are non-mining nodes. Although they aren’t mining Bitcoin, they are crucial for the operation of the blockchain. Two of the most popular specialised hardware options are MyNode and Umbrel and are fairly easy to set up and use.
Because each channel requires specific care and attention, running a node is more like an art than a science. When determining prices, traffic flow, which channels to open and close, and rebalancing, it is important to consider both the cost and the efficiency of moving the traffic by concentrating on a longer-term, more macro perspective.
Lightning nodes look for the most effective way to handle transactions. You must establish your own node’s charge at a price that is both affordable to the network and high enough to make it one of the most profitable methods to generate passive revenue with crypto.
So, is it actually possible to make money from running a Lightning node? Well technically, yes. Keep in mind that earning need not necessarily be a motivation to run a node. However you definitely can earn BTC by routing transactions from other nodes through yours. You need to ensure that your node wallet address holds BTC and channels have been established with other nodes.
The blockchain technology and infrastructure is here to stay. Although in its infancy, it’s a remarkable innovation with virtually endless use cases. The Lightning Network is a step towards solving the scalability issues detrimental to the adoption of Bitcoin. And gradually nonetheless, as the number of users of the Bitcoin network increases, so will the need for a scaling solution. Lightning Nodes present an interesting opportunity for individual users to be a part of the blockchain ecosystem. It’s an effective way to educate yourself, be an active participant in the ecosystem and earn some BTC as well!