💱Payment Channels
Payment channels are multisignature contracts between peers. Payments are made inside these payment channels and can be settled on the Blockchain.
The Lightning Network is made up of payment channels. Each channel represents an UTXO on the Bitcoin Blockchain and is cooperatively controlled by two peers, who can transact through that channel as frequently as they want.
Lifecycle of a Payment Channel
Payment channels on the Lightning Network allow two parties, such as Alice and Bob, to transact with bitcoin efficiently and securely without broadcasting every transaction to the blockchain. Here's a simplified explanation of the lifecycle of a payment channel:
Opening a Channel: Alice and Bob use their funds to create a 2-of-2 multisignature contract, known as the channel's address. Bob prepares a funding transaction to open the channel but keeps a commitment transaction as a backup to reclaim his funds if needed. Once everything is set, Bob broadcasts the funding transaction to the network, and the channel is open.
Sending Funds: Inside the channel, Alice and Bob can send bitcoin back and forth by updating their commitment transaction to reflect the new balances. These transactions are local and don't require blockchain confirmations, saving on transaction fees and time.
Closing a Channel: The channel can be closed in two ways:
Cooperatively: If Alice and Bob agree, they can sign a closing transaction that pays out the balances and broadcast it to the blockchain, ending the channel smoothly.
Non-cooperatively (Force Close): If they disagree or cannot contact each other, either Alice or Bob can use their most recent commitment transaction to close the channel. This type of closure might involve dispute resolution mechanisms to ensure fairness and prevent cheating.
Throughout these processes, security measures like revocation secrets protect against dishonest behavior, ensuring both parties act fairly. This system allows for rapid, low-cost transactions within the Lightning Network.
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