Crypto glossary
Lightning service provider (LSP)
A Lightning service provider (LSP) is a company that opens channels and manages liquidity for users of self-custodial Lightning wallets, usually for a fee.
Running a Lightning node well means opening channels, keeping enough inbound and outbound liquidity, staying online and choosing good peers. LSPs take over most of that work. When a user installs a self-custodial wallet such as Phoenix or Breez-based apps, the LSP opens a channel to the phone, often just in time when the first payment arrives, and keeps it funded so payments route smoothly.
The model lets ordinary users hold their own keys while enjoying an experience close to a custodial app. LSPs earn fees for opening channels and routing payments, and standards for how wallets request liquidity from different providers have been developed so users are not locked in. Techniques such as splicing let channels be resized without closing them.
An LSP cannot take the user's funds, but it does see much of their payment activity and can refuse service, which raises privacy and censorship concerns. Fees for channel openings rise when on-chain fees are high. If the provider disappears, the user can still close channels on-chain, though it may cost fees and time.
Example
A user installs a self-custodial Lightning wallet and receives 50,000 sats; the LSP opens a channel to the phone on the fly and deducts a small fee from the incoming payment.