Irrational Economic Action: Running a Bitcoin Lightning Node for Negative Profit

Abstract

Bitcoin’s layer 2 (L2) solution is a payment channel network (PCN) that has an internal market of its own. Businesses (node operators) compete on a cost basis to maximize use of their locked liquidity by minimizing channel fees. From an economic perspective this is a standard profit maximization problem, however as described in Béres, Seres, and Benczúr (2021), profit on node operation is so low that it is economically irrational. Despite this, the number of nodes continues to grow, even as the price of Bitcoin declines. Many node businesses likely operate at a net USD loss, especially when factors such as labor and loss of access to capital are considered. This paper is an economist’s account of entering into an apparently irrational market. Due to difficulties with surveying node operators, the primary objective of the paper, uncovering the reason for financial loss making activity, was not discovered, however this paper is the first to: describe the internal L2 market for routing; provide basic business balance sheet items for a median scale node; describe the on-boarding process of node operation; and identify the need for differentiation of personal/routing/hybrid nodes.The market for routing is near-perfect in terms of internal competition, but sub-optimally arranged. Operating losses that many node operators face appear to be rationalized as a “fiat only” loss, node operators exist within a Bitcoin-only profit paradigm. Computing the actual fiat profit margin is not possible, due to insufficient data regarding the average fiat cost of the bitcoin deposited to provide routing liquidity.