Bitcoin, Lightning & Liqudity Service Provider

What is Money & How Does It Work?

Understanding the Problem Kai Faces

Growing up in Turkey, Kai watched helplessly as inflation devoured his savings. The money he’d carefully tucked away—earnings from summer jobs and gifts from relatives—seemed to shrink before his eyes. One day, his savings could buy a new laptop; months later, barely half of one.

“Why does this keep happening?” Kai asked his father one evening, staring at his bank statement.

His father sighed. “It’s the lira. They keep printing more, so each one is worth less.”

This simple explanation sparked Kai’s curiosity about a fundamental question: What exactly is money, and why does it sometimes fail us?

The Three Functions of Money

Money serves three essential functions in society:

1. Store of Value: Money should maintain its purchasing power over time. When Kai saved lira, he expected it to preserve its value—but inflation betrayed this expectation.
2. Medium of Exchange: Money facilitates trade without requiring a coincidence of wants. Kai didn’t need to find someone who wanted his services and happened to be selling a laptop; money bridged that gap.
3. Unit of Account: Money provides a common measure of value. Kai could compare the price of different laptops because they were all priced in the same currency.

What Makes Money “Good”?

Throughout history, societies have used everything from seashells to giant stones as money. But not all forms of money are created equal. Good money should be:

• Scarce: Its supply cannot be arbitrarily increased (unlike the Turkish lira)
• Durable: It doesn’t deteriorate over time
• Divisible: It can be split into smaller units for smaller purchases
• Portable: It’s easy to transport
• Fungible: Each unit is interchangeable with any other unit

The Fatal Flaw of Fiat Money

The Turkish lira, like all fiat currencies, has one critical weakness: its supply is controlled by central authorities who can (and do) create more of it at will. This leads to:

• Inflation: As more currency enters circulation, each unit buys less
• Centralization of Power: Those who control the money supply wield enormous influence
• Vulnerability to Politics: Monetary policy becomes a political tool rather than an economic one

Kai wasn’t alone in his struggle. In Venezuela, people became millionaires overnight—but could barely afford bread. In Zimbabwe, inflation reached 79.6 billion percent at its peak, rendering the currency worthless.

As Kai researched these examples, a question formed in his mind: “Is there a better alternative? A form of money that can’t be manipulated?”

What & Why Bitcoin?

Discovering the Solution: Hard Money

One evening, while browsing an online forum about inflation, Kai encountered a term that would change his life: Bitcoin.

“It’s money that no government can print more of,” wrote one user. “Only 21 million will ever exist.”

Intrigued but skeptical, Kai began researching. Could this digital currency be the answer to the problems he’d witnessed with the lira?

The Birth of Bitcoin

In 2008, as the global financial system teetered on the brink of collapse, an anonymous figure using the pseudonym Satoshi Nakamoto published a nine-page document titled “Bitcoin: A Peer-to-Peer Electronic Cash System.”

The timing wasn’t coincidental. Banks had gambled with people’s money, governments had bailed them out, and ordinary citizens paid the price through inflation and austerity. Bitcoin offered an alternative: a monetary system without central authorities, where rules were enforced by mathematics rather than policy decisions.

How Bitcoin Works

What fascinated Kai most was Bitcoin’s architecture:

• Decentralization: No single entity controls Bitcoin. It operates through a network of computers (nodes) that collectively maintain its integrity.
• Proof-of-Work: New bitcoins are created through a resource-intensive process called mining, which secures the network and prevents double-spending.
• Fixed Supply: Only 21 million bitcoins will ever exist, with the last fraction of a bitcoin scheduled to be mined around the year 2140.

Bitcoin vs. Gold vs. Fiat

As Kai compared Bitcoin to traditional forms of money, he created a simple chart:

Property	Bitcoin	Gold	Fiat (Lira)
Scarcity	Fixed at 21M	Limited but unknown	Unlimited
Durability	Perfect	High	Medium
Portability	Excellent	Poor	Good
Divisibility	Excellent (8 decimals)	Poor	Good
Confiscation Resistance	High	Low	Very Low
Censorship Resistance	High	Medium	None

Bitcoin wasn’t just digital money—it was potentially the hardest form of money ever created.

Bitcoin as a Store of Value

For Kai, this was the revelation: Bitcoin could protect his savings from inflation. Unlike the lira, which lost value through endless printing, Bitcoin’s supply was mathematically capped. No central bank could create more. No government could devalue it through policy decisions.

He wasn’t alone in this realization. In Argentina, Turkey, Nigeria, and other countries with unstable currencies, people were turning to Bitcoin as a lifeline—a way to preserve their economic energy against the ravages of inflation.

Bitcoin as a Medium of Exchange

Can Kai Use Bitcoin for Fast & Cheap Payments?

Excited by Bitcoin’s potential as a store of value, Kai decided to try using it for everyday transactions. He bought some bitcoin, then attempted to pay for a coffee at a local café that accepted cryptocurrency.

The experience wasn’t what he expected.

“Your payment is processing,” the cashier said. “It might take about 10 minutes for the first confirmation.”

Kai waited, watching other customers pay with cards and move on within seconds. When he finally received his coffee, he checked the transaction fee: it was nearly as much as the coffee itself.

“This doesn’t make sense for small purchases,” he realized.

The Limitations of Bitcoin’s Base Layer

Kai’s experience highlighted a fundamental challenge with Bitcoin’s main blockchain (the “base layer”):

• Block Time: New blocks are added approximately every 10 minutes
• Block Size: Each block has limited space for transactions
• Transaction Fees: Users bid for inclusion in the next block, driving up fees during busy periods

These limitations are actually features, not bugs—they help keep Bitcoin decentralized and secure. But they also make it impractical for small, everyday transactions.

The Need for Scaling Solutions

If Bitcoin were to become a global monetary network serving billions of people, it would need to process thousands of transactions per second—far more than its base layer could handle. This realization led to the development of “layer 2” scaling solutions, with the Lightning Network emerging as the most promising.

Introduction to the Lightning Network

The Lightning Network is a second layer built on top of Bitcoin’s base layer. It enables:

• Instant Payments: Transactions confirm in seconds, not minutes
• Microscopic Fees: Payments cost fractions of a penny
• Massive Scalability: Potential for millions of transactions per second

The basic concept is simple: instead of recording every transaction on the blockchain, users open payment channels between themselves. They can then conduct unlimited transactions within these channels, only settling to the blockchain when they want to close the channel.

As Kai learned about Lightning, he saw its potential for transforming Bitcoin from just a store of value into a practical medium of exchange—one that could work for everything from buying coffee to sending microtransactions across borders.

How the Lightning Network Works

Understanding Liquidity & Routing Payments

Eager to try Lightning, Kai downloaded a Lightning wallet and transferred some bitcoin to it. His first few transactions worked flawlessly—instant payments with minimal fees. But then he tried to make a larger payment to an online merchant and encountered an error: “Payment failed: Not enough liquidity.”

“What does that mean?” Kai wondered. “I have enough bitcoin in my wallet.”

The Channel-Based Architecture of Lightning

To understand the error, Kai needed to grasp how Lightning actually works:

1. Opening Channels: When users join the Lightning Network, they open payment channels by committing bitcoin to a special type of Bitcoin transaction. This creates a financial connection between two nodes.
2. Channel Balances: Each channel has a balance on both sides. If Kai opens a channel with 0.01 BTC, initially all the funds are on his side. As he makes payments, some of that balance shifts to the other side.
3. Routing Payments: To pay someone you don’t have a direct channel with, Lightning finds a path through connected channels—like a package being forwarded through multiple carriers to reach its destination.

The Critical Role of Liquidity

Kai’s payment failed because of liquidity constraints. Lightning payments can only flow if there’s sufficient balance on the sending side of each channel along the route. This balance is called “outbound liquidity.”

Conversely, to receive payments, nodes need “inbound liquidity”—balance on the other side of their channels. New users often struggle because they have plenty of outbound liquidity (their own funds) but little inbound liquidity (others’ funds allocated to them).

How Payments Find Their Path

Lightning nodes don’t just connect randomly—they form a network where payments can be routed from sender to recipient through multiple channels. Specialized software automatically finds the optimal path based on:

• Available liquidity along potential routes
• Fee rates charged by each node
• Reliability and speed of different paths

This routing happens automatically, within seconds, and without requiring trust in the intermediary nodes. The technology that makes this possible—Hash Time-Locked Contracts (HTLCs)—ensures that intermediaries can’t steal funds in transit.

As Kai grasped these concepts, he realized something important: for the Lightning Network to function effectively, it needed well-connected nodes with balanced liquidity. And those who provided this service could earn bitcoin through routing fees.

Becoming a Lightning Service Provider (LSP)

Kai’s Path to Earning Sats

One evening, while troubleshooting another failed payment, Kai had an epiphany: “If people need liquidity to use Lightning effectively, and I can provide that liquidity, I could earn bitcoin while helping the network grow.”

This realization led him to explore becoming a Lightning Service Provider (LSP).

What is an LSP?

A Lightning Service Provider is an entity that offers services to make the Lightning Network more accessible and functional for users. Unlike casual node operators who might run a node for personal use, LSPs actively manage their nodes to provide value to the network and earn revenue.

Services Offered by LSPs

LSPs typically offer some combination of:

1. Inbound Liquidity: Opening channels to users to give them the ability to receive payments
2. Payment Routing: Connecting different parts of the network to facilitate transactions
3. Channel Management: Rebalancing channels, managing fees, and ensuring reliability
4. Specialized Services: Offering submarine swaps, watchtowers, or other technical services

How LSPs Make Money

Kai identified several revenue streams for LSPs:

1. Routing Fees: Earning a small fee for each payment that passes through their node
2. Liquidity Leasing: Charging for opening channels that provide inbound liquidity
3. Subscription Services: Offering premium features for monthly fees
4. Specialized Tools: Developing and selling software that enhances Lightning functionality

Examples of Successful LSPs

As he researched, Kai discovered several successful LSPs with different business models:

• LQWD: Focused on providing enterprise-grade liquidity and routing services
• Wallet of Satoshi: Offering custodial Lightning services for beginners
• Breez: Combining non-custodial wallet services with LSP functions
• Voltage: Providing node hosting and management for businesses

Each had found a niche in the growing Lightning ecosystem, proving that there were multiple paths to building a successful LSP business.

Setting Up a Lightning Node & Earning Sats

Kai Takes Action: Running an LSP Business

Armed with knowledge and motivation, Kai decided to set up his own Lightning node and begin building an LSP business. He started by assessing his options:

Hardware and Software Options

For his node, Kai considered:

1. Dedicated Hardware Options:
   • Purpose-built nodes like RaspiBlitz or myNode
   • Custom-built server with high-performance specs
   • Cloud-hosted virtual private server
2. Software Implementations:
   • LND (Lightning Network Daemon)
   • c-lightning
   • Eclair

After weighing reliability, cost, and ease of use, Kai opted for a mid-range dedicated server running LND, which offered a good balance of performance and established tooling.

Setting Up and Managing Channels

With his node online, Kai focused on strategic channel management:

1. Opening Strategic Channels: Rather than connecting randomly, Kai researched well-connected nodes and popular services to ensure his channels would route payments effectively.
2. Balancing Liquidity: He monitored channel balances and regularly rebalanced to maintain optimal liquidity in both directions.
3. Fee Strategy: Kai started with low fees to attract routing, then gradually adjusted based on channel performance and network conditions.
4. Uptime and Reliability: He implemented monitoring and alerts to ensure his node remained operational 24/7.

Building a Sustainable LSP Business

As his node began routing payments, Kai developed a broader business strategy:

1. Service Differentiation: He focused on providing liquidity to underserved regions, particularly connecting Turkish users to the global Lightning Network.
2. Automation: Kai developed scripts to automate channel management, fee adjustments, and rebalancing.
3. Community Engagement: He became active in Lightning forums and local Bitcoin meetups, building a reputation that brought more connections to his node.
4. Reinvestment: As routing fees accumulated, Kai reinvested them into opening more channels, creating a virtuous cycle of growth.

Measuring Success

To track his progress, Kai monitored several key metrics:

• Routing Volume: The amount of bitcoin flowing through his node
• Fee Revenue: Income generated from routing payments
• Channel Efficiency: How effectively his capital was being utilized
• Network Centrality: How well-connected his node was becoming

The Bigger Picture

As his LSP business grew, Kai realized he was contributing to something larger than himself. By providing liquidity and connectivity, he was helping build a more robust, accessible financial system—one that could protect people from the very inflation problems that had started him on this journey.

Each successful payment routed through his node represented someone sending value without permission, without excessive fees, and without the risk of inflation eating away at their money.

Conclusion: The Future of Money

Bitcoin, Lightning, and Liquidity Service Providers represent the three-layered foundation of a new financial paradigm — one built on mathematical certainty rather than centralized trust.

Bitcoin solves the fundamental problem of money by creating digital scarcity. Its fixed supply of 21 million coins provides a shield against inflation, while its decentralized nature protects it from government manipulation. As a base layer, Bitcoin offers unparalleled security and censorship resistance, but at the cost of speed and scalability.

The Lightning Network addresses these limitations by enabling instant, nearly free transactions that scale to global needs. By moving most transactions off-chain while inheriting Bitcoin’s security guarantees, Lightning transforms Bitcoin from merely a store of value into a practical medium of exchange—capable of handling everything from microtransactions to cross-border payments.

Liquidity Service Providers complete this ecosystem by solving Lightning’s accessibility challenges. By strategically deploying capital, managing channels, and facilitating connectivity, LSPs make Lightning usable for everyday people. They represent a new class of financial service providers—ones that earn revenue not through custody or control, but by enhancing network functionality.

Together, these three elements create a complete monetary system that combines the best attributes of traditional money with the advantages of digital technology. It’s as secure as gold, as divisible as fiat, and faster than any payment system that came before.

For people like Kai, this isn’t just technology—it’s freedom. Freedom from inflation, freedom from financial censorship, and freedom to transact globally without permission. By participating as an LSP, he’s not just earning bitcoin; he’s helping build a more open, efficient, and fair financial future for everyone.

The journey of Bitcoin, Lightning, and LSPs is still in its early stages, but the direction is clear: a world where money works for people, not the other way around.