Payment Channel

A payment channel is the general concept of two parties locking up Bitcoin in a shared on-chain output and exchanging signed balance updates between themselves, off-chain, without broadcasting each one. The chain sees two transactions total - one to open, one to close - while potentially thousands of transfers happen in between.

The mechanism solves Bitcoin's scaling tradeoff. On-chain, every payment costs block space, takes ~10 minutes to confirm, and pays a fee. Off-chain inside a channel, every payment is instant, costs nothing on-chain, and is enforced cryptographically rather than via the proof-of-work chain.

The minimum building blocks for a payment channel:

1. A 2-of-2 multisig output locking both parties' funds, opened with one on-chain transaction.
2. Commitment transactions - signed but unbroadcast transactions that each represent the current balance allocation. Each new transfer creates a new commitment that supersedes the previous one.
3. A revocation mechanism so that broadcasting an old (favored-to-me) commitment is severely punished. Without this, parties could cheat by reverting to a state they liked better.
4. A timeout mechanism so that no party can be permanently held hostage if the other goes offline.

The Lightning-specific implementation uses HTLCs and asymmetric revocation keys to make this trustless. See Lightning Channel for the Lightning-flavored details.

Other payment-channel designs exist or have been proposed - Eltoo is a notable proposal that simplifies the channel state model using SIGHASH_ANYPREVOUT, which would require a soft fork. As of 2026, the BOLT-spec Lightning channel design is what's actually deployed at scale.

Payment channels are how Bitcoin scales without enlarging the base chain. The Lightning Network is the practical realization of this idea.