This post is for the Bitcoin maxis.
Skip to the bottom to get the straight numbers.
Pre-requisites for understanding this article because I won’t be explaining these concepts in depth:
- Bitcoin basics
- The Lightning network & layer 2 solutions
The Cost of Buying and Hodling
(FYI “hodl” is not a typo)
I’ve spilled much digital ink on here advocating for Bitcoin on the virtue of its verifiability and neutrality, among other things.
However, there is one huge drawback to simply buying Bitcoin and holding it for 10 years waiting for it hit a gajillion dollars.
Like an index fund, you dollar cost average into it, hold it forever, and in case of emergency it’s still incredibly liquid. You can also keep both in tax-advantaged accounts (e.g. a self-managed IRA).
Unlike an index fund, you cannot lend it out (there are some platforms that say you can but I don’t trust them after Blockfi). You also cannot write covered calls on Bitcoin like you can a stock that you’re holding long term.
Lightning, however, poses a potentially interesting opportunity. This post is about doing some napkin math to see if it’s worthwhile.
High Overview of Opening a Lightning Channel
There’s too much to explain here, but here’s the relevant bit:
- A lightning channel is a way to use Bitcoin to pay for day-to-day things (like a coffee) in an instant, low-fee way. It is 1000x cheaper than using Visa.
- Opening a lightning channel requires you putting up bitcoin to fund your channel
- Your bitcoin stays in that channel as long as it’s open. If you want to use that Bitcoin, you close your channel (or spend it from that channel as a lightning payment)
- When your channel is open, other people can use your channel to facilitate their own payments. You get a fee if they do.
The last part is what I care about. The fee is usually tiny—like tenths of a cent. But then if you are buying and holding anyway, then isn’t it free money anyway?
- Add Fees collected
- Minus cost of running a lightning node
- Equals profit of “staking” your Bitcoin
I use the word “staking” specifically to trigger anyone who knows about ETH2.0 and the absolute ponzi that mechanic is.
How Much does a Lightning Channel Pay?
To estimate this, I need to know three things:
- Median fee rate per transaction
- Median transaction amount to apply that fee rate to
- Expected number of transactions per channel
That third one is tricky because the way lightning network looks is analogous to acity: lots of skyscrapers and activity in the center (large channels talking to each other), highways connecting groups of large channels, and small channels branching off of large channels.
Any one of us would be a smaller channel since we’re likely not staking 100 BTC of liquidity to facilitate these transactions.
Anyway, as of today, June 24 2023, this is what I found:
- Median fee rate: 0.0029% according to BitcoinKE
- Average transaction amount: 0.00508484 ($156 USD) according to Coingate
Essentially this nets a little less than half a cent per average transaction.
I’m honestly not sure how to find a good stat on what you could expect if you just put up a channel due to the fat tail distribution of channels.
However, one big key is that the average channel size is 0.333 BTC or $10,000 USD.
I would not expect to make and facilitate any payments if your channel is less than that.
It’s annoyingly difficult to find good stats on daily average lightning payments. Articles all say “it can handle 1,000,000 payments per second!!” which is cool but I want to know what it’s doing right now.
The best I could find is this Medium article showing how the biggest lightning wallet is nearing (and by now probably surpassed) 1,000,000 payments per month.
Really Bad Napkin Math
Let’s make up some numbers:
- Wallet of Satoshi estimated at a 1/4 of all lightning wallet payments
- 70,000 channels
- 4,000,000 payments per month over 70,000 channels is roughly 57 payments per channel
- 57 times the average payment of 0.44 cents (this number pulled from above median and average fee) means you’d earn one quarter per month
Annualized (lol) that’s $3 per year. Based off average channel size, that’s 0.03% return.
That’s less than 1 basis point.
- The average channel is funded with at least $10,000
- The return per year on fees for transactions is $3.
- That translates to less than one basis point.
Is it worth it? Of course not.
The costs of electricity running your node, managing risk (since a lightning channel is a hot wallet), and the on-chain fees for even creating the channel (which I never even mentioned) obviously make this a bad idea financially.
If you want to open a channel for other reasons, cool. If it’s a way to extract yield from your hodling, it’s a terrible idea.