Payment Channel

A payment channel is a Layer 2 method that lets two parties make unlimited instant payments by locking funds in a contract and exchanging signed off-chain balance updates. Settlement hits the chain only at the end. Alice and Bob each deposit into a multi-signature contract. They then sign messages such as Alice has 7, Bob has 3. Each new message replaces the last.

Updates are instant and free of gas.

The channel can stay open and handle thousands of payments. To close, they post the latest jointly signed state and the contract pays out. If Bob posts an old state that favors him, Alice can post a newer one with proof of recency. A challenge period lets the other side contest. Payment channel networks such as Lightning on Bitcoin and Raiden on Ethereum connect channels into a mesh.

Alice can pay Carol through Bob if Alice-Bob and Bob-Carol channels exist, using hash time-locked contracts so the multi-hop payment is atomic. That network effect is what makes channels useful beyond a single pair.

A payment channel is a Layer 2 scaling technique that enables unlimited instant transactions between two parties by locking funds in an on-chain smart contract and exchanging signed off-chain messages that update the balance distribution without touching the blockchain until final settlement. ' Each new message supersedes previous ones.

A payment channel is a two-party ledger you can update cheaply. Lightning routes across many of those channels.