Definition
A payment channel is the foundational building block of the Lightning Network. Two parties open a channel by broadcasting a single on-chain funding transaction that locks Bitcoin into a 2-of-2 multisignature output controlled by both keys. Once confirmed, the pair can exchange an effectively unlimited number of payments off-chain by re-signing the channel's balance, settling on the Bitcoin blockchain only when they choose to close.
Commitment transactions and balance updates
The current split of funds is recorded in a pair of commitment transactions, each signed by the counterparty. To send value, the parties simply sign a new commitment reflecting the updated balance. No miner ever sees these intermediate states, which is why Lightning payments are near-instant and cost a fraction of an on-chain fee.
Revocation keeps old states honest
Because every past commitment remains technically valid, the protocol uses a revocation mechanism: before adopting a new state, each party hands over the secret needed to punish them if they ever broadcast the old one. If a cheater publishes a stale commitment, the honest party can sweep the entire channel balance using a penalty (justice) transaction. This trust-minimized design, descended from the Poon-Dryja construction, is what lets Lightning scale Bitcoin without custodians.
Channels are the medium through which HTLCs route multi-hop payments. To understand how funds become spendable in both directions, see channel capacity.
In Simple Terms
A payment channel is the foundational building block of the Lightning Network. Two parties open a channel by broadcasting a single on-chain funding transaction that…