Lightning Network Liquidity and Payment Challenges

How Liquidity can affect success of transactions on the Lightning Network

Often Lightning gets criticised for the fact that at present it is possible for transactions to fail and this, when it happens, leads to a negative perception of the UX. This is more usual by shitcoiners or newbies who do not fully know how the protocol really works and what are trade off for the layer 2 itself.

Differently from on-chain transactions, Lightning ones can fail and liquidity makes an important role on these happenings.

In the ecosystem of Lightning Network, liquidity is a critical concept that shapes the efficiency and success of transactions. Two main types of liquidity, inbound and outbound, play vital roles in the functionality of nodes and the overall network. The concept is important both for final users and for node runners. Node runners, who manage their nodes for business, must have strategies to manage liquidity and channels balancing.

Inbound Liquidity: receiving Sats

Inbound liquidity represents the quantity of Sats a node is capable of receiving. It pertains to the value existing on the opposite side of the channels linked to the node. Notably, nodes have no authority over the fees associated with inbound liquidity transactions. Moreover, they do not accrue any fees from incoming transactions.

Outbound Liquidity: Empowering the Node

Conversely, outbound liquidity pertains to the volume of Sats a node can send. This liquidity resides on the node's side of the connected channels. In this scenario, nodes maintain control over the fees charged on outbound liquidity transactions. This control grants nodes the ability to manage and adjust fees according to their preferences. On real case scenario, this can be accomplished either manually or automatically using various tools, for example charge-lnd or other customized scripts.

Diving into Lightning Network Fees

A deeper look into fees reveals two distinct types within the Lightning Network. The base fee, a fixed charge imposed on every transaction, stands as one category. The other is the fee rate, a variable dependent on the transaction's size. It is noteworthy that ongoing endeavors are underway to establish a network-wide standard of setting base fees to zero. This initiative would enhance the efficiency of multi-route payments and bolsters the success rates of transactions.

Individual Liquidity Challenges

Each node grapples with unique liquidity challenges. For users who predominantly employ the Lightning Network for expenditures, consistent replenishment of outbound liquidity remains essential. Conversely, businesses that receive payments must focus on replenishing inbound liquidity. Failure to do so necessitates customers to establish direct channels, potentially complicating the user experience. For these reasons the balancing strategy must be tailored on the business you are doing with your node. You should always plan an accurate balancing strategy for your node, tailored for your needs.

What about Payment Failures?

Despite the advancements within the Lightning Network, successful payments cannot be guaranteed in the present landscape. The intricacies of the network can lead to payment failures due to various technical reasons. For instance, nodes might struggle to identify viable routes, leading to unsuccessful transactions. Additionally, the search for a suitable route might extend beyond an acceptable time frame, resulting in timeouts after a minute. The Lightning development community is actively engaged in multiple engineering efforts aimed at resolving these issues and enhancing the network's reliability.

What failed payments can lead to

It is crucial to understand that failed payments do not translate to lost funds. This is a frequent misconception by newbies.

However, the occurrence of payment failures significantly impacts user experience, creating a negative ripple effect. As such, the ongoing efforts to enhance the Lightning Network's robustness and success rates hold paramount importance in delivering a seamless and efficient payment ecosystem.