Difference between revisions of "Fees And Profitability"

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== Intro ==
WARNING: Running a routing node is not for generating a primary source of income. The lightning technology is still developing at a very fast pace. The strategy which may generate some income would stop working very soon and something else will take their place. Do not commit more than you what you can have fun with when you enter the rabbit hole of a routing node.


Having said that, most people enter the rabbit hole of a routing node to have fun but also generate some income, however small. The excitement to watch the first route pass through your node with 1 Sat fees is an amazing moment for many.
To understand node profitability you must understand the various components of the economics of routing node.
== Components of Profitability ==
* Costs
you will incur the following costs during your routing node journey.
# Capital Expense: One time expenses incurred for setting up your node.
## Cost of node hardware and peripherals.
## Cost of UPS and other peripherals.
You should aim to recover the cost of capital expenditures over the useful life of the expense. i.e. if the node is going to last you 3 years before you decide to upgrade, you must aim to recover 1/3 of the cost every year. In accounting terms this is called depreciation.
# Cost Of Goods Sold
## Channel Rebalancing Fee Paid if any.
## Operating Expenses
## Chanel Open and Close Fees paid on-chain
# Other Expenses (minor but could be significant for some)
## Electricity Cost
## Network Bandwidth Cost
Against these costs, you will earn routing fees as Income. If you offer other services via your node, you might have additional income.
You should measure the profitability of your node as below
Gross Margin = Fee Earned - Cost of Good Sold (Fee Paid)
Operating Margin = Gross Margin - Operating Expenses (Channel Open/Close fees and other costs)
And finally, you have cash flow
Net Cash Flow = Cummulative Operating Margin - CAPEX
Your aim should be to be positive on all these metrics. Of course, it takes time for a node to be fully profitable.
== Setting Routing Fees ==
Before you set your routing fees, you should have a good understanding of your costs.
Your routing fees is set up on each channel as
#Base Fees in mSat (1000 mSat = 1 Sat)
#Fee Rate in ppm  (1 ppm = 1 Sat per 1_000_000 Sat routed)
You earn routing fees *only on flows going out of your channel*. In other words you earn fees for sending your Local Balance to Remote Balance of a channel. Your fees on the incoming channel are not relevant for the purpose for fee earned.
Fee Earned = Base Fee/1_000 + Routed Amount * Fee Rate / 1_000_000
Assume you had a Base Fee of 10_000 mSat and Fee Rate of 200 ppm. Now assume a payment of 750_000 Sats is forwarded via your node on this channel. The fee you will earn for this transaction would be <pre>10_000/1_000 + 200 * 750_000/1_000_000 = 10 + 150 = 160 Sats</pre>

Revision as of 11:37, 3 August 2021

Intro

WARNING: Running a routing node is not for generating a primary source of income. The lightning technology is still developing at a very fast pace. The strategy which may generate some income would stop working very soon and something else will take their place. Do not commit more than you what you can have fun with when you enter the rabbit hole of a routing node.

Having said that, most people enter the rabbit hole of a routing node to have fun but also generate some income, however small. The excitement to watch the first route pass through your node with 1 Sat fees is an amazing moment for many.

To understand node profitability you must understand the various components of the economics of routing node.

Components of Profitability

  • Costs

you will incur the following costs during your routing node journey.

  1. Capital Expense: One time expenses incurred for setting up your node.
    1. Cost of node hardware and peripherals.
    2. Cost of UPS and other peripherals.

You should aim to recover the cost of capital expenditures over the useful life of the expense. i.e. if the node is going to last you 3 years before you decide to upgrade, you must aim to recover 1/3 of the cost every year. In accounting terms this is called depreciation.

  1. Cost Of Goods Sold
    1. Channel Rebalancing Fee Paid if any.
    2. Operating Expenses
    3. Chanel Open and Close Fees paid on-chain
  2. Other Expenses (minor but could be significant for some)
    1. Electricity Cost
    2. Network Bandwidth Cost

Against these costs, you will earn routing fees as Income. If you offer other services via your node, you might have additional income.

You should measure the profitability of your node as below

Gross Margin = Fee Earned - Cost of Good Sold (Fee Paid)

Operating Margin = Gross Margin - Operating Expenses (Channel Open/Close fees and other costs)

And finally, you have cash flow Net Cash Flow = Cummulative Operating Margin - CAPEX

Your aim should be to be positive on all these metrics. Of course, it takes time for a node to be fully profitable.

Setting Routing Fees

Before you set your routing fees, you should have a good understanding of your costs.

Your routing fees is set up on each channel as

  1. Base Fees in mSat (1000 mSat = 1 Sat)
  2. Fee Rate in ppm (1 ppm = 1 Sat per 1_000_000 Sat routed)

You earn routing fees *only on flows going out of your channel*. In other words you earn fees for sending your Local Balance to Remote Balance of a channel. Your fees on the incoming channel are not relevant for the purpose for fee earned.

Fee Earned = Base Fee/1_000 + Routed Amount * Fee Rate / 1_000_000

Assume you had a Base Fee of 10_000 mSat and Fee Rate of 200 ppm. Now assume a payment of 750_000 Sats is forwarded via your node on this channel. The fee you will earn for this transaction would be

10_000/1_000 + 200 * 750_000/1_000_000 = 10 + 150 = 160 Sats