Lightning Service Providers are not custodians. LSPs like Breez act as intermediaries that help users connect to the Lightning Network for a fee, but they do so without ever having control over your funds.

Unlike custodial Lightning services like the application Wallet of Satoshi, LSPs don’t hold your bitcoin, as they do not have access to your cryptographic private key. Their main role is to facilitate access to the Lightning Network, allowing you to make quick Bitcoin transactions. Even if LSPs can close the channels they created, this just sends your bitcoin back to your regular On-chain Bitcoin Wallet, so you still have full control over it.

The Requirement of a Lightning Node

To use an LSP, it’s necessary to operate a Lightning node. Without one, you won’t be able to connect to any LSP, as the Lightning Network relies on nodes to establish connections. This makes the node a crucial element for receiving services from LSPs.

Non-custodial Lightning wallets like the wallet inside the Relai app come with an integrated Lightning Node, which is hosted in the background by Greenlight/Blockstream. In contrast, Lightning wallets that are custodial like Wallet of Satoshi do not have their own Lightning node and instead rely on nodes managed by the wallet service provider.

LSP-Managed Channels and Liquidity

Channels opened by LSPs function in the same way as any other Lightning Network channel, retaining all the on-chain enforceability properties. However, what sets LSPs apart is their professional management of liquidity.

LSPs specialize in maintaining liquidity. This professional liquidity management results in a higher chance of successful payments for nodes connected to them, compared to relying on less experienced, hobbyist node operators. By connecting your node to an LSP, you benefit from improved payment reliability and a smoother transaction experience.