Overview
A Lightning channel is the fundamental building block of the Lightning Network. It is a two-party payment channel established by a funding transaction that locks bitcoin into a 2-of-2 multisig address on-chain. Once the channel is open and confirmed, both parties can transact with each other off-chain an unlimited number of times, updating their respective balances without touching the blockchain.
Channel Lifecycle
1. OPEN 2. TRANSACT (off-chain) 3. CLOSE
┌──────────┐ ┌──────────────────────┐ ┌──────────┐
│ Funding │ │ Alice: 0.7 Bob: 0.3 │ │ Closing │
│ tx goes │───→│ Alice: 0.5 Bob: 0.5 │───→│ tx goes │
│ on-chain │ │ Alice: 0.2 Bob: 0.8 │ │ on-chain │
└──────────┘ └──────────────────────┘ └──────────┘
Channel States
Each off-chain payment updates the channel state — a pair of commitment transactions that reflect the current balance split. Old states are invalidated using revocation keys, so that if one party tries to broadcast a stale state, the other can claim all the funds as a penalty.
Capacity and Liquidity
A channel's total capacity is fixed at the amount locked in the funding transaction. Liquidity shifts between the two sides as payments flow. If Alice has 0.8 BTC on her side, she can send up to 0.8 BTC but can only receive up to whatever Bob has on his side.
Common Misconceptions
A common misunderstanding is that you need a direct channel to pay someone on Lightning. In reality, payments are routed through multiple channels via multi-hop payments, so you can pay anyone reachable through the network graph.