Payment Channels are off-chain protocols that facilitate multiple cryptocurrency transactions between two parties to occur instantly and at a low cost, without requiring each individual transaction to be recorded directly on the main blockchain. Only the initial opening and final closing transactions of the channel are broadcast to the primary ledger.
Mechanism
A payment channel is initiated when two parties deposit cryptocurrency into a multi-signature address or smart contract on the main blockchain, effectively “locking” these funds. Subsequent transactions between these specific parties then take place off-chain, with each participant signing and exchanging updated balance sheets. When the parties conclude their interactions, the final aggregated state of the balance is broadcast and settled on the main blockchain, avoiding the latency and fees associated with on-chain confirmations for every micro-transaction.
Methodology
The strategic approach aims to significantly enhance blockchain scalability and transactional efficiency by shifting high-frequency, low-value transactions away from the main chain. It provides a mechanism for near-instantaneous settlement and substantially reduces transaction costs, thereby making cryptocurrencies more viable for everyday commerce. This methodology relies on robust cryptographic security and game theory principles to ensure honest participation, as any party can unilaterally close the channel at any time to claim their rightful balance on-chain.
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