MSTR Cat

Blockchain/Level V · Layers/5.1 Lightning/Lesson 6

Lightning wallets and service providers

Who holds the keys, who opens the channels, and where the fees go

MaterialsA smartphone with a non-custodial Lightning wallet installed (Phoenix, Breez, or Zeus)Access to a public channel graph explorer such as 1ML.comThe documentation page of one Lightning service provider detailing fee schedules

Wonder

  1. What does a custodial wallet actually hold on behalf of its user?
  2. How does a non-custodial mobile node obtain inbound liquidity without waiting for a counterparty to open a channel first?
  3. Why did a national government launch a Lightning-enabled wallet in 2021, and what happened next?

Explore

  1. Lightning wallets split into two categories by key custody. Custodial wallets hold users’ funds: the provider keeps the keys, runs the node and manages channels, and the user holds a claim on the provider. Users trade sovereignty for convenience: no setup, instant receiving, but full reliance on the provider’s solvency and compliance posture. Non-custodial wallets keep keys on the user’s device; the user controls funds directly but must manage or procure channel liquidity.
  2. Phoenix, developed by ACINQ in France, is a prominent non-custodial mobile node built on Lightning-KMP, a Kotlin implementation optimized for smartphones. When the user first receives funds, it opens a channel with ACINQ’s node automatically, supplying inbound capacity without user intervention. Other non-custodial wallets take different routes: some rely on an LSP to open channels, some (like Zeus) mainly control a node the user runs, and some newer designs swap through other layers instead of holding channels.
  3. Lightning service providers function as infrastructure partners rather than custodians. They open channels toward the user’s node, ensuring immediate receiving capability. This solves the onboarding bottleneck where new users possess only outbound capacity from self-funded channel openings. LSPs charge for this, typically a fee when they open a channel or add liquidity.
  4. Exchanges and payment applications increasingly integrate Lightning deposits and withdrawals, letting users move funds quickly and cheaply between an exchange account and their own wallets. The exchange holds custody until the funds are withdrawn.
  5. El Salvador’s Chivo wallet launched on 7 September 2021, the day bitcoin became legal tender; Lightning support was added in early 2022 through outside providers. The government held users’ keys custodially and distributed free bitcoin to citizens. Surveys found that everyday use fell away after the sign-up bonus, a story told in Level 6.
  6. Open a public network graph viewer such as 1ML or mempool.space Lightning. Identify a node with high inbound capacity and note its connected peers. Then check a mobile wallet’s documentation to see which LSP it partners with for initial channel funding. Compare the fee schedule: some providers charge a flat opening cost, others take a percentage of each swap.

Key facts

  • Custodial Lightning wallets hold users’ funds and keys; non-custodial wallets keep keys on the user’s device.
  • Phoenix by ACINQ opens a channel with ACINQ’s node automatically when the user first receives funds.
  • Lightning service providers open channels toward users’ nodes to supply instant receiving capacity for a fee.
  • El Salvador’s Chivo wallet launched in 2021 as a custodial, government-operated Lightning-enabled application.
  • Non-custodial mobile wallets like Breez and Zeus rely on LSPs for liquidity management despite user-held keys.
  • Exchanges integrate Lightning deposits and withdrawals to connect fiat accounts with the second layer.

Exercise nine, six, three, one

9CollectList 9 Lightning wallet implementations. Note whether each is custodial or non-custodial, which node software it runs (if any), and how it sources inbound liquidity for new users.
6ClusterGroup the 9 into 6 by their key-custody model and liquidity procurement method: fully custodial, LSP-backed self-custody, user-managed channels, exchange-integrated, government-operated, or other hybrid.
3DistillReduce the 6 groups to 3 core trade-offs between sovereignty, convenience, and counterparty risk.
1CrystallizeWrite 1 sentence on what a Lightning service provider actually does for a non-custodial user that the user cannot easily do alone at onboarding time.

Fact check

Dates, figures and claims checked against the published sources listed below.

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