GlossaryIntermediate
Payment Channel
A direct connection between two parties that lets them exchange many off-chain payments, settled on-chain only when the channel closes.
A payment channel is a direct connection between two parties, opened with an on-chain transaction, that lets them exchange any number of payments between themselves off-chain, updating their respective balances without broadcasting each individual payment to the network.
Only the channel's opening and closing transactions are typically recorded on-chain — everything in between is tracked privately between the two parties, which is what makes networks like Lightning dramatically faster and cheaper than individual on-chain transactions.
Examples
- A payment channel between two frequent trading partners lets them settle many small payments without paying an on-chain fee for each one.
- The Lightning Network connects many individual payment channels into a broader routable network.