The lightning network is a “layer 2” protocol that runs on bitcoin. It makes payments fast and inexpensive. Nodes on the network commit bitcoin to channels, which are a bit like bar tabs. A multitude of transactions can be routed back and forth through a channel before reconciling the balance on the blockchain. The “bar tabs” form a network which allows for payments to be routed from any node to another in just a few “hops”. Think of Six Degrees of Separation but for lightning nodes.
An important measure of the usefulness of the lightning network is the amount of bitcoin that is committed to the payment channels. This recently reached 5,000 bitcoin. At the current exchange rate, this is worth about 154M AUD. This liquidity is what makes lightning work.
When node operators open new channels, they typically stump up the bitcoin for this. As such, the balance of the channel is all on their side at first. This is “out-going” liquidity. This is okay if you intend to do spending. To route transactions though, some “in-bound” liquidity is needed too and markets are emerging to incentivize this when desired.
One of the first marketplaces for liquidity on lightning is Pool. A more recent alternative is Magma. One operator is even paying for help in establishing inbound liquidity. This author tried the latter. The payout barely balanced offset routing fees in shunting liquidity but the operation could be viable at larger scales.
Some node operators solicit inbound liquidity be making “keysends” to others. These are small payments with a message attached such as the following:
deezy.io will now buy your liquidity at any time! open a new channel, push btc to deezy’s size, get paid via keysend (then deezy will close the channel). check out the api…– Keysend received in September.
The lightning network is undergoing an unanticipated stress test today. Due to a bug related to Segwit, a large number nodes using Lightning Labs’ software (lnd) are not connected. A fix for this is imminent.