Lightning Channel

A Lightning channel is a two-party payment relationship built on a single bitcoin transaction that locks funds in a 2-of-2 multisignature address. Once the channel is open, the two parties can rebalance the locked funds between themselves an effectively unlimited number of times without touching the blockchain, paying on-chain fees only when the channel opens and closes.

Why it matters

Channels are the basic building block of the Lightning Network. Because updates happen off-chain, a channel can settle thousands of payments per second between its participants, with fees measured in fractions of a cent. Routing links channels together, so two people without a direct channel can still pay each other through intermediaries.

Safety rests on the ability to exit unilaterally. Either party can broadcast the latest channel state and recover its balance on-chain, so cooperation is preferred but never strictly required.

How it works

Opening a channel means funding the multisig address and exchanging signed commitment transactions that define how the balance would split if the channel closed immediately. Each new payment replaces the previous commitment with an updated split. Publishing an outdated commitment exposes the cheater to a penalty that forfeits their entire channel balance to the honest party, which keeps both sides honest without a referee.