Now that Bitcoin is in a bear market it’s a good opportunity to work on new business opportunities in the crypto space. Once the next bull run starts the emphasis will be mainly on price again and it will be harder to focus on building out new ideas. One of the things we are focusing on at First Block Capital is the Lightning Network, a second layer solution on top of the Bitcoin blockchain (and several other blockchains) that will lead to super fast and super cheap transactions. Basically Lightning makes Bitcoin the perfect payment method. There are still a lot of hurdles to overcome before we are there but I am confident the teams working on it will get there.
I was relatively late to the Bitcoin game (I first started investing in early 2013), but I was early to the Lightning Network. Last year I invested a small amount in Lightning Labs‘ seed round (through AngelList) and have been closely following the technology since. After the initial beta for developers earlier this year I started looking for business models on top of Lightning (Lightning Apps (Lapps), basically 3rd layer solutions on top of a blockchain) but also realized we needed to set up a Lightning node at First Block.
We did set up a node and quickly became the 6th most connected node on the Lightning Network with over 200 open channels. This sounds easier than it is, the Lightning network is still very user unfriendly and opening up channels is a time consuming manual process. At one point we actually lost half of our channels and our in-house Lightning expert Chang Li had to set them up all over again.
However, the return on investment is huge. By trying and breaking things we learn a lot about Lightning, information that is not available online yet, and I believe we now know more about Lightning than most other companies in the crypto space. But even better, we also make money with it! I had seen theoretical models that predicted that well connected nodes can earn 60-80% per year in Bitcoin on the funds in its channels, but I thought that would only be the case once Lightning would be more mature.
Turns out I was wrong. After many of our channels had crashed Chang added up the money in our node to see if we lost anything and it turned out we had made about $125 in just one week on an investment of $2000 (spread over 200 channels). That is over 5% per week! We paid about $60 in transaction fees to set up all the nodes, so basically we earned that back in 3-4 days and all returns after that are profit (not taking the time to set up the nodes into account nor the cost of the server). We can always close our channels and get our $2000 investment back, plus all the fees we earned.
The ‘problem’ is that we don’t know how we made this money. Lightning is so new that you can’t easily see which (or even how many) transactions went through your node and how much you made per transaction. Our thinking is that Satoshi’s Place (an interesting Lightning ‘game’ based on the million dollar homepage) led to a large number of transactions through our node, but we don’t know for sure. We are now looking at how we can best record the number of transactions and the average fee per transaction (we believe gathering and analyzing Lightning data may be another angle to earn money).
We have a lot more ideas for Lightning that we may work on. My personal opinion is that if Lightning should take off it will change the Internet as we know it. Not only will Bitcoin go sky high, but it will likely change the business model of most of the top Internet companies. I believe the next generation of multi-billion dollar companies may be based on Lightning and now is the time to start thinking about them and build (or fund) them.
I’m looking for tutorials, videos and blogs that cover Lightning. If you can share some resources with me, I’ll absorb what you can share, and pay it forward by teaching others.
I’m currently a Blockchain Developer for Loci.io, owner of Emmonspired LLC, a Certified Bitcoin Professional, Certified Ethereum Developer, Full Stack Developer and Advisor on Cryptocurrency projects. I’m also the creator of a Youtube Channel and iTunes Podcast called #ByteSizeBlockchain.
Hi Dan Emmons,
You can find a comprehensive guide about Bitcoin & Lightning here: https://lopp.net/bitcoin.html & https://lnroute.com/
I hope you will enjoy them!
which implementation of Lightning were you using in this situation?
Lightning Network Daemon
Thanks for sharing. I notice you are running 1/3rd of the nodes now that you were when this post was published. What’s changed? Are you scaling back?
I notice that you are now running 1/3rd of the nodes (~66) than when this post was published. What’s changed since then? Curious to know more.
Hi Marc. Last week we setup an LN node, and funded it with ~$250. Since then we’ve received ~$0.00049 in fees, a .0002% return. Granted, we’re very naieve at this stage and we’ll look for ways to optimise our channels, but it’s a huge order of magnitude less that the 5% you said you achieved.
Care to speculate why it might be, or how you’re picking which channels to open?
P.S. let me know your node’s IP, we’ll open a channel to you!
@Ian, not everyone can become the “6th most used node”. To achieve that, the lightning network algorithm has as part of the “what path to take”, a “time open” value. If you look at the graph of the lightning network, you will see the nodes in the middle have of course been open the longest. There are other factors as well, BTC you have in there, and still other factors. @Marc, I assume First Block might have interest in a banking platform that is less friction than stellar or Ripple – ie NationPay.io or innovative asset and company tokenization platforms that far exced Polymath in straegy ( RealSafe.co ) – both with IP protection. Thanks!
If you are interested in running your own Lightning node check out https://lightninginabox.co
@Ian 0.00049 in fees = 0.00115% ?
To all those who are interested and would like to set up a lightning node on their own, there is a generous program by digitalocean that gives you 100 USD in cloud hosting credits for 2 months. Perfect to set up an LN node and play around with it! Search for “lightning node how to setup on digitalocean” and get yourself an account at DO. If you use this link it will give you the credit after signup: https://m.do.co/c/8949111a23b1
Great Report! Thank you for this post!
From my understanding, the best way to make fees is to connect to the larger channels and fund a lot of bitcoin in the lightning wallet to allow it to process transactions. Does that sound correct?
So the goal is to connect to the biggest and most active channels.
Also to have plenty of BTC in the wallet to process everything.
Please let me know your thoughts or if this is correct.
Thank you!! I highly appreciate you!