Generating yield on Bitcoin’s Lightning Network is fiendishly complex, but the data analytics firm Amboss says its new Lightning Network Rate (Liner) simplifies the process by providing key insights into yield opportunities on the network.
Lightning is a second-layer payment network for cheaper and faster bitcoin (BTC) transactions that requires users to acquire liquidity – the ability to send and receive payments – by first committing bitcoin to a payment channel.
Service providers on the network will commit funds, open payment channels and temporarily lease excess liquidity to users for a fee, thereby generating yield on their committed funds.
To maximize that yield, service provider nodes must ensure they match with other nodes capable of maximizing transaction volume, maintaining round-the-clock availability (offline nodes cannot route payments), and providing liquidity for a set time period. This matching process can already be done on Amboss’s liquidity marketplace Magma, which launched last year, and now the firm says Liner will be the marketplace’s benchmark rate for measuring bitcoin returns on committed capital.
“Liner is a way to generate yield without giving up custody,” said Jesse Shrader, CEO and co-founder of Amboss in an interview with CoinDesk. “People gave their bitcoin to Celsius and gave it to BlockFi and now have nothing to show for it. We're promising yields on their bitcoin. Folks made the mistake of trusting another platform to hold that for them, but that's not necessary with Lightning. ”
Amboss didn’t pioneer the liquidity marketplace, nor did it pioneer the concept of a benchmark rate. Lightning infrastructure firm Lightning Labs launched Lightning Pool in 2020, almost two years before Amboss. Lightning Pool aggregates supply and demand of liquidity, allowing buyers to submit bids for that liquidity via a sealed-bid auction, while also generating a “current lease rate” for capital similar to Liner.
According to author and investor Jonathan Bier’s book Reckless: The Story Of Cryptocurrency Interest Rates, Lightning Pool had double the volume of Magma circa November 2022.
“We operate a liquidity marketplace. If you want to buy a channel from anybody that has an offer listed, you can go and do that and compare the prices,” said Shrader. “That's one piece of it, just provisioning this liquidity. On the other side, the person that's providing the liquidity, they get some yield out of it.”
Adding Liner to Magma will allow liquidity providers to determine whether committing their capital will be worth their while. Similarly, purchasers of liquidity will be able to determine the cost of leasing channel capacity. LINER Yield will cater to liquidity providers while LINER Cost will target those seeking liquidity.
Magma currently shows yields ranging from roughly 2% to 3%. It’s important to note that these are what Shrader calls “self-custodial yields,” meaning returns are only generated from the provisioning of liquidity without any bitcoin changing hands.