Payment Channel

A payment channel is a state channel used specifically for transfers, letting two parties move funds back and forth off-chain by exchanging signed balance updates after funding a shared on-chain contract. Only the opening and closing transactions touch the blockchain, so the payments in between are effectively instant and cost almost nothing, which suits small or frequent payments that would be uneconomic on-chain. Networks such as Bitcoin's Lightning Network link many channels together so funds can be routed through intermediaries instead of opening a direct channel with everyone. The risks are practical: a channel can only move as much as is locked in it, routing can fail, and a party that stays offline too long may need a watchtower to contest an outdated closing attempt.