Payment Channel

A payment channel is a technique that lets two parties transact many times off-chain while only recording two transactions on the blockchain: one to open the channel and one to close it. The parties lock funds into a shared, jointly controlled address, then exchange cryptographically signed balance updates directly between themselves; only the final balance is settled on-chain when the channel closes.

A concrete example: Alice opens a channel with Bob by locking 0.01 BTC. She can then pay Bob 1,000 satoshis, then another 500, then receive 200 back — hundreds of updates, each instant and essentially free, none touching the blockchain. When either party closes the channel, the latest signed balance is written on-chain and each side receives their share. Security comes from the signatures: if Bob tried to close the channel with an old balance that favored him, Alice can publish the newer state within a dispute window and, in designs like Lightning's, claim a penalty.

Payment channels are the building block of the Lightning Network, which links many channels into a routed network so payments can flow between people who never opened a channel with each other. The main constraints are that funds must be locked up in advance, both parties' balances limit how much can flow in each direction, and someone must remain online (or delegate to a watchtower) to catch fraudulent closes. A common misconception is that channel payments are IOUs; each update is an enforceable claim on real locked funds, not a promise.