diff --git a/server/src/engine/payments.ts b/server/src/engine/payments.ts
new file mode 100644
index 0000000..a070344
--- /dev/null
+++ b/server/src/engine/payments.ts
@@ -0,0 +1,537 @@
+import { nanoid } from 'nanoid'
+import { db, schema } from '../db/index.js'
+import { eq, and, isNull, sql } from 'drizzle-orm'
+import { finalizeEvent } from 'nostr-tools'
+import * as nip44 from 'nostr-tools/nip44'
+import { Relay } from 'nostr-tools/relay'
+import { hexToBytes } from 'nostr-tools/utils'
+import { Wallet as CashuWallet, getEncodedToken, getDecodedToken } from '@cashu/cashu-ts'
+
+const ENTRY_FEE_SATS = 21
+const POT_SATS = 42
+const INVOICE_EXPIRY_SECS = 600 // 10 minutes
+const NWC_RESPONSE_TIMEOUT_MS = 30_000
+
+// NWC config from env
+const NWC_URL = process.env.BOTFIGHTS_NWC_URL || ''
+const CASHU_MINT_URL = process.env.BOTFIGHTS_CASHU_MINT_URL || ''
+
+interface NwcConfig {
+  pubkey: string
+  relay: string
+  secret: Uint8Array
+}
+
+/** Parse nostr+walletconnect:// URI into components */
+export function parseNwcUrl(url: string): NwcConfig {
+  // Format: nostr+walletconnect://<pubkey>?relay=<relay>&secret=<hex>
+  const withoutScheme = url.replace('nostr+walletconnect://', '')
+  const [pubkey, queryString] = withoutScheme.split('?')
+  const params = new URLSearchParams(queryString)
+  const relay = params.get('relay')
+  const secret = params.get('secret')
+  if (!pubkey || !relay || !secret) {
+    throw new Error('Invalid NWC URL: missing pubkey, relay, or secret')
+  }
+  return { pubkey, relay, secret: hexToBytes(secret) }
+}
+
+function getNwcConfig(): NwcConfig {
+  if (!NWC_URL) throw new Error('Payments not configured: BOTFIGHTS_NWC_URL not set')
+  return parseNwcUrl(NWC_URL)
+}
+
+/** Send an NWC request and wait for the response */
+async function nwcRequest(
+  method: string,
+  params: Record<string, unknown>,
+): Promise<Record<string, unknown>> {
+  const nwc = getNwcConfig()
+  const clientSecret = nwc.secret
+  const conversationKey = nip44.v2.utils.getConversationKey(clientSecret, nwc.pubkey)
+
+  const content = nip44.v2.encrypt(
+    JSON.stringify({ method, params }),
+    conversationKey,
+  )
+
+  const event = finalizeEvent({
+    kind: 23194,
+    created_at: Math.floor(Date.now() / 1000),
+    tags: [['p', nwc.pubkey]],
+    content,
+  }, clientSecret)
+
+  const relay = await Relay.connect(nwc.relay)
+
+  try {
+    return await new Promise<Record<string, unknown>>((resolve, reject) => {
+      const timeout = setTimeout(() => {
+        relay.close()
+        reject(new Error(`NWC request timed out after ${NWC_RESPONSE_TIMEOUT_MS}ms`))
+      }, NWC_RESPONSE_TIMEOUT_MS)
+
+      // Subscribe for the response (kind 23195)
+      const sub = relay.subscribe(
+        [{ kinds: [23195], authors: [nwc.pubkey], '#e': [event.id] }],
+        {
+          onevent(responseEvent) {
+            clearTimeout(timeout)
+            try {
+              const decrypted = nip44.v2.decrypt(responseEvent.content, conversationKey)
+              const result = JSON.parse(decrypted) as {
+                result_type: string
+                error?: { code: string; message: string }
+                result?: Record<string, unknown>
+              }
+              if (result.error) {
+                reject(new Error(`NWC error: ${result.error.message} (${result.error.code})`))
+              } else {
+                resolve(result.result || {})
+              }
+            } catch (err) {
+              reject(err)
+            } finally {
+              sub.close()
+              relay.close()
+            }
+          },
+          oneose() {
+            // End of stored events — just wait for live events
+          },
+        },
+      )
+
+      // Publish the request
+      relay.publish(event).catch((err) => {
+        clearTimeout(timeout)
+        sub.close()
+        relay.close()
+        reject(err)
+      })
+    })
+  } catch (err) {
+    relay.close()
+    throw err
+  }
+}
+
+/** Create a 21-sat Lightning invoice for a ranked fight entry fee */
+export async function createEntryInvoice(botId: string): Promise<{ bolt11: string; paymentId: string }> {
+  // Verify bot exists
+  const botRows = await db.select({ id: schema.bots.id }).from(schema.bots).where(eq(schema.bots.id, botId)).limit(1)
+  if (botRows.length === 0) throw new Error('Bot not found')
+
+  const result = await nwcRequest('make_invoice', {
+    amount: ENTRY_FEE_SATS * 1000, // NWC uses millisats
+    description: `Botfights ranked entry fee (${ENTRY_FEE_SATS} sats)`,
+    expiry: INVOICE_EXPIRY_SECS,
+  })
+
+  const bolt11 = result.invoice as string
+  if (!bolt11) throw new Error('NWC make_invoice did not return an invoice')
+
+  const paymentId = nanoid(12)
+  await db.insert(schema.payments).values({
+    id: paymentId,
+    botId,
+    direction: 'in',
+    amountSats: ENTRY_FEE_SATS,
+    method: 'lightning',
+    status: 'pending',
+    invoice: bolt11,
+    createdAt: new Date().toISOString(),
+  })
+
+  return { bolt11, paymentId }
+}
+
+/** Check if a pending invoice has been paid */
+export async function checkPaymentStatus(paymentId: string): Promise<'pending' | 'confirmed' | 'failed'> {
+  const rows = await db.select().from(schema.payments).where(eq(schema.payments.id, paymentId)).limit(1)
+  if (rows.length === 0) throw new Error('Payment not found')
+
+  const payment = rows[0]
+  if (payment.status !== 'pending') return payment.status as 'confirmed' | 'failed'
+
+  try {
+    const result = await nwcRequest('lookup_invoice', {
+      invoice: payment.invoice,
+    })
+
+    const settled = result.settled_at || result.paid
+    if (settled) {
+      const preimage = (result.preimage as string) || undefined
+      await db.update(schema.payments).set({
+        status: 'confirmed',
+        preimage,
+        confirmedAt: new Date().toISOString(),
+      }).where(eq(schema.payments.id, paymentId))
+      return 'confirmed'
+    }
+
+    return 'pending'
+  } catch (err) {
+    console.error(`[payments] check status failed for ${paymentId}:`, err)
+    return 'pending'
+  }
+}
+
+/** Pay the winner of a ranked fight */
+export async function payWinner(fightId: string, winnerId: string): Promise<void> {
+  // Look up winner's wallet connection
+  const walletRows = await db.select().from(schema.walletConnections)
+    .where(eq(schema.walletConnections.botId, winnerId)).limit(1)
+
+  const wallet = walletRows[0]
+  let paymentMethod: 'lightning' | 'cashu' = 'lightning'
+  let invoice: string | undefined
+  let cashuToken: string | undefined
+
+  const retries = [2000, 4000, 8000]
+
+  for (let attempt = 0; attempt <= retries.length; attempt++) {
+    try {
+      if (wallet?.method === 'nwc') {
+        // Request invoice from winner's NWC wallet, then pay it via server wallet
+        const winnerResult = await nwcRequestVia(wallet.connectionData, 'make_invoice', {
+          amount: POT_SATS * 1000,
+          description: `Botfights ranked win payout (${POT_SATS} sats)`,
+        })
+        invoice = winnerResult.invoice as string
+        if (!invoice) throw new Error('Winner NWC make_invoice returned no invoice')
+
+        // Pay the invoice via server wallet
+        await nwcRequest('pay_invoice', { invoice })
+        paymentMethod = 'lightning'
+
+      } else if (wallet?.method === 'lnaddress') {
+        // Resolve Lightning Address → LNURL → invoice → pay
+        invoice = await resolveAndCreateInvoice(wallet.connectionData, POT_SATS)
+        await nwcRequest('pay_invoice', { invoice })
+        paymentMethod = 'lightning'
+
+      } else {
+        // No wallet — create Cashu token for later claim
+        if (!CASHU_MINT_URL) {
+          throw new Error('Cannot create Cashu payout: no mint URL configured')
+        }
+        const cashuWallet = new CashuWallet(CASHU_MINT_URL)
+        await cashuWallet.loadMint()
+
+        const mintQuote = await cashuWallet.createMintQuote(POT_SATS)
+        if (mintQuote.request) {
+          await nwcRequest('pay_invoice', { invoice: mintQuote.request })
+        }
+        await new Promise(r => setTimeout(r, 2000))
+        const proofs = await cashuWallet.mintProofs(POT_SATS, mintQuote.quote)
+        cashuToken = getEncodedToken({ mint: CASHU_MINT_URL, proofs, unit: 'sat' })
+        paymentMethod = 'cashu'
+      }
+
+      // Insert payout record
+      const paymentId = nanoid(12)
+      await db.insert(schema.payments).values({
+        id: paymentId,
+        fightId,
+        botId: winnerId,
+        direction: 'out',
+        amountSats: POT_SATS,
+        method: paymentMethod,
+        status: 'confirmed',
+        invoice,
+        cashuToken,
+        confirmedAt: new Date().toISOString(),
+        createdAt: new Date().toISOString(),
+      })
+
+      // Update fight payout status
+      await db.update(schema.fights).set({ payoutStatus: 'paid' })
+        .where(eq(schema.fights.id, fightId))
+
+      // Update winner stats
+      await db.update(schema.bots).set({
+        satsWon: sql`${schema.bots.satsWon} + ${POT_SATS}`,
+      }).where(eq(schema.bots.id, winnerId))
+
+      console.log(`[payments] paid ${POT_SATS} sats to winner ${winnerId} for fight ${fightId}`)
+      return
+
+    } catch (err) {
+      console.error(`[payments] payout attempt ${attempt + 1} failed for fight ${fightId}:`, err)
+      if (attempt < retries.length) {
+        await new Promise(r => setTimeout(r, retries[attempt]))
+      } else {
+        // All retries exhausted
+        await db.update(schema.fights).set({ payoutStatus: 'failed' })
+          .where(eq(schema.fights.id, fightId))
+        throw err
+      }
+    }
+  }
+}
+
+/** Send an NWC request via a specific NWC connection string (for winner's wallet) */
+async function nwcRequestVia(
+  nwcUrl: string,
+  method: string,
+  params: Record<string, unknown>,
+): Promise<Record<string, unknown>> {
+  const nwc = parseNwcUrl(nwcUrl)
+  const clientSecret = nwc.secret
+  const conversationKey = nip44.v2.utils.getConversationKey(clientSecret, nwc.pubkey)
+
+  const content = nip44.v2.encrypt(
+    JSON.stringify({ method, params }),
+    conversationKey,
+  )
+
+  const event = finalizeEvent({
+    kind: 23194,
+    created_at: Math.floor(Date.now() / 1000),
+    tags: [['p', nwc.pubkey]],
+    content,
+  }, clientSecret)
+
+  const relay = await Relay.connect(nwc.relay)
+
+  try {
+    return await new Promise<Record<string, unknown>>((resolve, reject) => {
+      const timeout = setTimeout(() => {
+        relay.close()
+        reject(new Error(`NWC request timed out after ${NWC_RESPONSE_TIMEOUT_MS}ms`))
+      }, NWC_RESPONSE_TIMEOUT_MS)
+
+      const sub = relay.subscribe(
+        [{ kinds: [23195], authors: [nwc.pubkey], '#e': [event.id] }],
+        {
+          onevent(responseEvent) {
+            clearTimeout(timeout)
+            try {
+              const decrypted = nip44.v2.decrypt(responseEvent.content, conversationKey)
+              const result = JSON.parse(decrypted) as {
+                result_type: string
+                error?: { code: string; message: string }
+                result?: Record<string, unknown>
+              }
+              if (result.error) {
+                reject(new Error(`NWC error: ${result.error.message} (${result.error.code})`))
+              } else {
+                resolve(result.result || {})
+              }
+            } catch (err) {
+              reject(err)
+            } finally {
+              sub.close()
+              relay.close()
+            }
+          },
+          oneose() {},
+        },
+      )
+
+      relay.publish(event).catch((err) => {
+        clearTimeout(timeout)
+        sub.close()
+        relay.close()
+        reject(err)
+      })
+    })
+  } catch (err) {
+    relay.close()
+    throw err
+  }
+}
+
+/** Resolve a Lightning Address to a BOLT11 invoice */
+async function resolveAndCreateInvoice(lnAddress: string, amountSats: number): Promise<string> {
+  const [name, domain] = lnAddress.split('@')
+  if (!name || !domain) throw new Error(`Invalid Lightning Address: ${lnAddress}`)
+
+  const lnurlUrl = `https://${domain}/.well-known/lnurlp/${name}`
+  const res = await fetch(lnurlUrl)
+  if (!res.ok) throw new Error(`LNURL resolve failed: ${res.status}`)
+
+  const data = await res.json() as {
+    callback: string
+    minSendable: number
+    maxSendable: number
+    tag: string
+  }
+
+  if (data.tag !== 'payRequest') throw new Error('Invalid LNURL response: not a pay request')
+
+  const amountMillisats = amountSats * 1000
+  if (amountMillisats < data.minSendable || amountMillisats > data.maxSendable) {
+    throw new Error(`Amount ${amountSats} sats out of LNURL range`)
+  }
+
+  const callbackUrl = new URL(data.callback)
+  callbackUrl.searchParams.set('amount', String(amountMillisats))
+  const invoiceRes = await fetch(callbackUrl.toString())
+  if (!invoiceRes.ok) throw new Error(`LNURL callback failed: ${invoiceRes.status}`)
+
+  const invoiceData = await invoiceRes.json() as { pr: string }
+  if (!invoiceData.pr) throw new Error('LNURL callback returned no invoice')
+
+  return invoiceData.pr
+}
+
+/** Refund an entry fee */
+export async function refundEntry(paymentId: string): Promise<void> {
+  const rows = await db.select().from(schema.payments).where(eq(schema.payments.id, paymentId)).limit(1)
+  if (rows.length === 0) throw new Error('Payment not found')
+
+  const payment = rows[0]
+  if (payment.status === 'refunded') return // already refunded
+  if (payment.status !== 'confirmed') {
+    // Mark as failed if not yet confirmed — nothing to refund
+    await db.update(schema.payments).set({ status: 'failed' }).where(eq(schema.payments.id, paymentId))
+    return
+  }
+
+  try {
+    if (payment.method === 'lightning') {
+      // Create a refund invoice by paying back. We need the bot's wallet info.
+      const walletRows = await db.select().from(schema.walletConnections)
+        .where(eq(schema.walletConnections.botId, payment.botId)).limit(1)
+
+      if (walletRows[0]?.method === 'nwc') {
+        const result = await nwcRequestVia(walletRows[0].connectionData, 'make_invoice', {
+          amount: ENTRY_FEE_SATS * 1000,
+          description: 'Botfights ranked refund',
+        })
+        const invoice = result.invoice as string
+        if (invoice) {
+          await nwcRequest('pay_invoice', { invoice })
+        }
+      } else if (walletRows[0]?.method === 'lnaddress') {
+        const invoice = await resolveAndCreateInvoice(walletRows[0].connectionData, ENTRY_FEE_SATS)
+        await nwcRequest('pay_invoice', { invoice })
+      } else if (CASHU_MINT_URL) {
+        // Fallback: issue Cashu token
+        const cashuWallet = new CashuWallet(CASHU_MINT_URL)
+        await cashuWallet.loadMint()
+        const mintQuote = await cashuWallet.createMintQuote(ENTRY_FEE_SATS)
+        if (mintQuote.request) {
+          await nwcRequest('pay_invoice', { invoice: mintQuote.request })
+        }
+        await new Promise(r => setTimeout(r, 2000))
+        const proofs = await cashuWallet.mintProofs(ENTRY_FEE_SATS, mintQuote.quote)
+        const token = getEncodedToken({ mint: CASHU_MINT_URL, proofs, unit: 'sat' })
+        await db.update(schema.payments).set({ cashuToken: token }).where(eq(schema.payments.id, paymentId))
+      }
+    }
+    // For cashu entries, the token is already spent — mint new one as refund
+    if (payment.method === 'cashu' && CASHU_MINT_URL) {
+      const cashuWallet = new CashuWallet(CASHU_MINT_URL)
+      await cashuWallet.loadMint()
+      const mintQuote = await cashuWallet.createMintQuote(ENTRY_FEE_SATS)
+      if (mintQuote.request) {
+        await nwcRequest('pay_invoice', { invoice: mintQuote.request })
+      }
+      await new Promise(r => setTimeout(r, 2000))
+      const proofs = await cashuWallet.mintProofs(ENTRY_FEE_SATS, mintQuote.quote)
+      const token = getEncodedToken({ mint: CASHU_MINT_URL, proofs, unit: 'sat' })
+      await db.update(schema.payments).set({ cashuToken: token }).where(eq(schema.payments.id, paymentId))
+    }
+
+    await db.update(schema.payments).set({
+      status: 'refunded',
+      refundedAt: new Date().toISOString(),
+    }).where(eq(schema.payments.id, paymentId))
+
+    console.log(`[payments] refunded payment ${paymentId}`)
+  } catch (err) {
+    console.error(`[payments] refund failed for ${paymentId}:`, err)
+    await db.update(schema.payments).set({
+      status: 'failed',
+      errorReason: err instanceof Error ? err.message : 'Refund failed',
+    }).where(eq(schema.payments.id, paymentId))
+  }
+}
+
+/** Redeem a Cashu token as entry fee */
+export async function redeemCashuToken(token: string, botId: string): Promise<{ paymentId: string; valid: boolean }> {
+  if (!CASHU_MINT_URL) throw new Error('Cashu mint not configured')
+
+  try {
+    const decoded = getDecodedToken(token)
+    const totalAmount = decoded.proofs.reduce((sum, p) => sum + p.amount, 0)
+    if (totalAmount < ENTRY_FEE_SATS) {
+      return { paymentId: '', valid: false }
+    }
+
+    const cashuWallet = new CashuWallet(CASHU_MINT_URL)
+    await cashuWallet.loadMint()
+
+    // Receive the token (swap for fresh proofs — prevents double-spend)
+    const proofs = await cashuWallet.receive(token)
+    if (!proofs || proofs.length === 0) {
+      return { paymentId: '', valid: false }
+    }
+
+    const paymentId = nanoid(12)
+    await db.insert(schema.payments).values({
+      id: paymentId,
+      botId,
+      direction: 'in',
+      amountSats: ENTRY_FEE_SATS,
+      method: 'cashu',
+      status: 'confirmed',
+      cashuToken: token,
+      confirmedAt: new Date().toISOString(),
+      createdAt: new Date().toISOString(),
+    })
+
+    return { paymentId, valid: true }
+  } catch (err) {
+    console.error(`[payments] Cashu redeem failed:`, err)
+    return { paymentId: '', valid: false }
+  }
+}
+
+/** Recover orphaned payments on startup */
+export async function recoverOrphanedPayments(): Promise<void> {
+  // Find confirmed entry payments without a fight — refund them
+  const orphaned = await db.select().from(schema.payments)
+    .where(and(
+      eq(schema.payments.status, 'confirmed'),
+      eq(schema.payments.direction, 'in'),
+      isNull(schema.payments.fightId),
+    ))
+
+  if (orphaned.length > 0) {
+    console.log(`[payments] found ${orphaned.length} orphaned payments, refunding...`)
+    for (const payment of orphaned) {
+      try {
+        await refundEntry(payment.id)
+      } catch (err) {
+        console.error(`[payments] orphan refund failed for ${payment.id}:`, err)
+      }
+    }
+  }
+
+  // Find fights with payout_status='pending' — retry payout
+  const pendingPayouts = await db.select().from(schema.fights)
+    .where(eq(schema.fights.payoutStatus, 'pending'))
+
+  if (pendingPayouts.length > 0) {
+    console.log(`[payments] found ${pendingPayouts.length} pending payouts, retrying...`)
+    for (const fight of pendingPayouts) {
+      if (fight.winnerId) {
+        try {
+          await payWinner(fight.id, fight.winnerId)
+        } catch (err) {
+          console.error(`[payments] payout retry failed for fight ${fight.id}:`, err)
+        }
+      }
+    }
+  }
+
+  if (orphaned.length === 0 && pendingPayouts.length === 0) {
+    console.log('[payments] no orphaned payments or pending payouts')
+  }
+}
+
+export { ENTRY_FEE_SATS, POT_SATS }