What are Bitcoin Swap Fees?

When moving Bitcoin between the main Bitcoin blockchain (on-chain), the Lightning Network, and the Liquid sidechain, “swap fees” refer to the costs incurred during the transition from one environment to another. Each of these systems has its own fee structure and mechanisms. Here’s how they differ and what contributes to the fees in each context:

1. On-Chain Bitcoin (Main Layer)

  • Nature of Fees:
    On-chain Bitcoin transactions require paying a transaction fee to miners. This fee is based on network demand and transaction size (in bytes). The higher the congestion, the higher the required fee to get your transaction confirmed promptly.

  • When Relevant:

    • Funding a Lightning channel (to move BTC onto LN).
    • Pegging into or out of the Liquid network.
    • Settling final balances from LN or Liquid back onto the Bitcoin main chain.

2. Lightning Network (Off-Chain Second Layer)

  • Nature of Fees:
    The Lightning Network does not rely on miners for every transaction. Instead, fees typically come in two forms:

    1. Channel Opening/Closing Fees: To move BTC onto LN, you must open a payment channel via a Bitcoin on-chain transaction. Similarly, to revert your LN funds back to the main chain, you’ll close the channel with another on-chain transaction, incurring miner fees.
    2. Routing Fees: Once your BTC is on the LN, sending payments through the network involves tiny fees paid to the nodes that route your payment. These fees are generally very low, especially compared to on-chain fees.

  • When Relevant:

    • Moving BTC from on-chain to LN: You pay the on-chain fee to open a channel.
    • Transacting within LN: You pay minimal routing fees.
    • Withdrawing from LN back on-chain: You pay another on-chain fee to close the channel.

3. Liquid Network (Sidechain to Bitcoin)

  • Nature of Fees:
    The Liquid Network is a federated sidechain pegged 1:1 to Bitcoin. Moving BTC into Liquid (peg-in) or out of Liquid (peg-out) involves special steps:

    1. Peg-In:
      • You send on-chain BTC to a Liquid federation address.
      • You pay a normal Bitcoin miner fee for this transaction.
      • After enough confirmations, you receive “L-BTC” (Liquid BTC) on the Liquid sidechain.
    2. Transactions Within Liquid:
      • Liquid transactions typically have lower fees than on-chain BTC because blocks are produced at a fixed interval and capacity is less contested.
      • Fees in Liquid are paid in L-BTC, but they are minimal and primarily serve as an anti-spam measure.
    3. Peg-Out:
      • To move L-BTC back to the Bitcoin main chain, a peg-out request is submitted. This involves waiting for the federation to release the corresponding BTC on the main chain.
      • Ultimately, you’ll pay a Bitcoin miner fee on the main chain transaction that delivers your BTC. Some peg-out providers might also charge a small service fee.

  • When Relevant:

    • Moving BTC into Liquid for faster, cheaper, and confidential transactions.
    • Eventually returning L-BTC to regular BTC on the main chain.

Cross-Environment Swaps

  • On-Chain ↔ Lightning:

    • Move BTC from on-chain to LN by opening a channel (incurs a miner fee).
    • Move BTC from LN to on-chain by closing a channel (another miner fee).

  • On-Chain ↔ Liquid:

    • Peg into Liquid: On-chain transaction fee + waiting for confirmations.
    • Peg out of Liquid: Small Liquid transaction fee + on-chain miner fee upon final settlement.

  • Lightning ↔ Liquid:

    • Often involves a third-party service or specialized “swap” tool that simultaneously arranges a Lightning payment and a Liquid transaction.
    • You’d incur LN routing fees and minimal Liquid transaction fees, plus potentially a service fee charged by the swap provider. If you need to open or close LN channels in the process, that adds on-chain miner fees.

Key Takeaways

  • On-Chain Bitcoin: High security, but transactions can be slow and expensive due to miner fees and network congestion.
  • Lightning Network: Very cheap and fast for everyday transactions once channels are open, but channel opening/closing requires on-chain fees.
  • Liquid Network: Faster and cheaper than on-chain with confidential transactions, but requires an on-chain peg-in and peg-out if you need to return to main-chain BTC.

In short, moving BTC between these layers involves trade-offs among speed, cost, and complexity. Fees can include on-chain miner fees, LN routing fees, and minimal Liquid network fees, plus any service charges if using third-party bridging services.