Lightning Channels

Levels of Information Exchange

• Peer-to-peer communications (Lightning protocol): These are the messages that Lightning nodes send to each other to communicate. We will represent these messages with dashed black lines in our diagrams.
• Payment channels (Lightning protocol): These are the paths for exchanging funds on Lightning, which we will represent with solid black lines.
• Bitcoin transactions (Bitcoin protocol): These are the transactions made on-chain, which we will represent with orange lines.

Steps to Open a Lightning Channel

• Message exchange: Alice wants to open a channel with Bob. She sends him a message containing the amount she wants to deposit in the channel (130,000 sats) and her public key. Bob responds by sharing his own public key.

• Creation of the multisignature address: With these two public keys, Alice creates a 2/2 multisignature address, meaning that the funds that will later be deposited on this address will require both signatures (Alice and Bob) to be spent.

• Deposit transaction: Alice prepares a Bitcoin transaction to deposit funds on this multisignature address. For example, she may decide to send 130,000 satoshis to this multisignature address. This transaction is constructed but not yet published on the blockchain.

• Withdrawal transaction: Before publishing the deposit transaction, Alice constructs a withdrawal transaction so she can recover her funds in case of a problem with Bob. Indeed, once Alice publishes the deposit transaction, her sats will be locked on a 2/2 multisignature address, which requires both her signature and Bob's signature to be unlocked. Alice protects against this loss risk by constructing the withdrawal transaction that allows her to recover her funds.

• Bob's signature: Alice sends the deposit transaction to Bob as proof and asks him to sign the withdrawal transaction. Once Bob's signature is obtained on the withdrawal transaction, Alice is assured of being able to recover her funds at any time, as only her own signature is now needed to unlock the multisignature.

• Publication of the deposit transaction: Once Bob's signature is obtained, Alice can publish the deposit transaction on the Bitcoin blockchain, thereby officially opening the Lightning channel between the two users.

When is the channel open?

• Opening a channel starts with the exchange of messages between the two parties (exchange of amounts and public keys).
• A channel is formed by creating a 2/2 multisignature address and depositing funds into it via a Bitcoin transaction.
• The person opening the channel ensures they can recover their funds through a withdrawal transaction signed by the other party before publishing the deposit transaction.