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@ -215,11 +215,11 @@ More details about Counterparty can be found at https://counterparty.io. The ope
[[state_channels]] [[state_channels]]
=== Payment Channels and State Channels === Payment Channels and State Channels
_Payment channels_ ((("blockchain applications", "payment (state) channels", id="BCApayment12")))are a trustless mechanism for exchanging bitcoin transactions between two parties, outside of the bitcoin blockchain. These transactions, which would be valid if settled on the bitcoin blockchain, are held off-chain instead, acting as _promissory notes_ for eventual batch settlement. Because the transactions are not settled, they can be exchanged without the usual settlement latency, allowing extremely high transaction throughput, low (sub-millisecond) latency, and fine (satoshi-level) granularity. _Payment channels_ ((("blockchain applications", "payment (state) channels", id="BCApayment12")))((("payment (state) channels", "defined")))are a trustless mechanism for exchanging bitcoin transactions between two parties, outside of the bitcoin blockchain. These transactions, which would be valid if settled on the bitcoin blockchain, are held off-chain instead, acting as _promissory notes_ for eventual batch settlement. Because the transactions are not settled, they can be exchanged without the usual settlement latency, allowing extremely high transaction throughput, low (sub-millisecond) latency, and fine (satoshi-level) granularity.
Actually, the term _channel_ is a metaphor. State channels are virtual constructs represented by the exchange of state between two parties, outside of the blockchain. There are no "channels" per-se and the underlying data transport mechanism is not the channel. We use the term channel to represent the relationship and shared state between two parties, outside of the blockchain. Actually, the term _channel_ is a metaphor. State channels are virtual constructs represented by the exchange of state between two parties, outside of the blockchain. There are no "channels" per-se and the underlying data transport mechanism is not the channel. We use the term channel to represent the relationship and shared state between two parties, outside of the blockchain.
To further explain this concept, think of a TCP stream. From the perspective of higher-level protocols it is a "socket" connecting two applications across the internet. But if you look at the network traffic, a TCP stream is just a virtual channel over IP packets. Each endpoint of the TCP stream sequences and assembles IP packets to create the illusion of a stream of bytes. Underneath, it's all disconnected packets. Similarly, a payment channel is just a series of transactions. If properly sequenced and connected, they create redeemable obligations that you can trust even though you don't trust the other side of the channel. ((("payment (state) channels", "concept of")))To further explain this concept, think of a TCP stream. From the perspective of higher-level protocols it is a "socket" connecting two applications across the internet. But if you look at the network traffic, a TCP stream is just a virtual channel over IP packets. Each endpoint of the TCP stream sequences and assembles IP packets to create the illusion of a stream of bytes. Underneath, it's all disconnected packets. Similarly, a payment channel is just a series of transactions. If properly sequenced and connected, they create redeemable obligations that you can trust even though you don't trust the other side of the channel.
In this section we will look at various forms of payment channels. First we will examine the mechanisms used to construct a one-way (unidirectional) payment channel for a metered micro-payment service, such as streaming video. Then, we will expand on this mechanism and introduce bidirectional payment channels. Finally, we will look at how bidirectional channels can be connected end-to-end to form multihop channels in a routed network, first proposed under the name _Lightning Network_. In this section we will look at various forms of payment channels. First we will examine the mechanisms used to construct a one-way (unidirectional) payment channel for a metered micro-payment service, such as streaming video. Then, we will expand on this mechanism and introduce bidirectional payment channels. Finally, we will look at how bidirectional channels can be connected end-to-end to form multihop channels in a routed network, first proposed under the name _Lightning Network_.