What Is the Lightning Network’s Payment Channel?

Two people who plan to transact many times don’t need to tell the entire Bitcoin network about every single one. A payment channel lets them handle it privately, between just the two of them, until they’re done.

A payment channel is the core building block of the Lightning Network: a mechanism that lets two parties lock up Bitcoin together in a shared, multisignature-style output on the base blockchain, then exchange as many updated balance agreements between themselves as they want, entirely off-chain.

Opening a channel requires one on-chain transaction, where both parties commit funds to a shared output. From that point on, every payment between them is simply a new, mutually signed update to how that shared balance should be split, entirely through signed messages passed directly between the two parties.

Closing the channel requires one more on-chain transaction, settling the final agreed-upon balance back to the Bitcoin blockchain — meaning a channel that processed a thousand small payments only ever needs two actual on-chain transactions total: one to open, one to close.

What stops one party from cheating by broadcasting an old, more favorable balance? Each channel update includes a mechanism letting the other party penalize exactly this kind of dishonesty — if an old state gets broadcast after a newer one exists, the honest party has a window to prove it and claim the entire channel balance as a penalty.

Channels don’t need to connect every possible pair of users directly — this is exactly what allows the Lightning Network to route a payment across several connected channels, even between two people who’ve never opened a channel with each other.

Want to see how routing actually works across a network of these channels? Continue learning in the Bitcoin Academy.