BA-11 · LESSON 01

Payment channels

KEY DEFINITIONS

Terms used in this lesson

UTXO: Unspent transaction output: one discrete chunk of bitcoin that can be used as a transaction input.

Pre-signed state updates let parties transact off chain while retaining an enforceable on-chain settlement path.

35 min Difficulty 3/5 Not started

VISUAL MODEL

See the whole mechanism before going step by step

Use the diagrams to orient yourself. Then the guided explanation below teaches every part in depth.

4 explanatory views

CONCEPT-SPECIFIC MAP · state machineOne valid action transforms a known stateSelect any state to inspect its exact role.

RELATIONSHIP MAPOrdered mechanism flow

01
BEFOREKnown state
Identify the facts and objects that exist before the action.
02
ACTIONPayment channels
The Payment channels lesson isolates the event that proposes a change.
03
RULEDeterministic check
The enforcing rule accepts or rejects the proposed transition.
04
AFTERSuccessor state
Accepted work creates a new state without silently changing the prior facts.
05
FAILUREState unchanged
A failed condition must not produce a partially accepted successor.

Rule shown: A valid transition names the prior state, action, enforcing rule, and successor state.

STAGE 1 OF 5BEFORE: Known state

Identify the facts and objects that exist before the action.

Governing relationship: A valid transition names the prior state, action, enforcing rule, and successor state. Complete path: 1. BEFORE, Known state. Identify the facts and objects that exist before the action. 2. ACTION, Payment channels. The Payment channels lesson isolates the event that proposes a change. 3. RULE, Deterministic check. The enforcing rule accepts or rejects the proposed transition. 4. AFTER, Successor state. Accepted work creates a new state without silently changing the prior facts. 5. FAILURE, State unchanged. A failed condition must not produce a partially accepted successor.

1. State transitionWhat exists, what changes, and what results

BEFORE

Alice and Bob fund 100,000 sats, initially allocated 60,000 to Alice and 40,000 to Bob.

MECHANISM

Participants confirm a Bitcoin output controlled by the channel policy. Off-chain balances cannot exceed the value and conditions committed there.

AFTER

A channel update changes enforceable claims to one locked UTXO, not Bitcoin's confirmed UTXO set yet.

Text equivalent: Starting from Alice and Bob fund 100,000 sats, initially allocated 60,000 to Alice and 40,000 to Bob. The mechanism begins when Participants confirm a Bitcoin output controlled by the channel policy. Off-chain balances cannot exceed the value and conditions committed there. The resulting lesson is A channel update changes enforceable claims to one locked UTXO, not Bitcoin's confirmed UTXO set yet.

2. Mechanism pathSelect a stage to inspect its job

STAGE 1 OF 5

Create a funding output

Participants confirm a Bitcoin output controlled by the channel policy. Off-chain balances cannot exceed the value and conditions committed there.

Complete path: 1. Create a funding output: Participants confirm a Bitcoin output controlled by the channel policy. Off-chain balances cannot exceed the value and conditions committed there. 2. Prepare enforceable settlement: Each party receives signatures or signature-ready data for a transaction reflecting the current allocation and a safe unilateral close. 3. Exchange a new state: They negotiate updated balances, verify the exact successor commitments, and complete the protocol's invalidation or replacement of the prior state. 4. Repeat without chain writes: Many balance updates remain private between participants and avoid one on-chain transaction per payment. 5. Close cooperatively or unilaterally: A cooperative close spends funding with mutual signatures. If coordination fails, a party broadcasts its latest enforceable commitment and follows delay or dispute rules.

3. Rule and failure boundaryWhat accepts the result and where it can stop

ACCEPTED PATH

Every successor allocation must remain nonnegative, conserve the fixed channel capacity, and carry both parties' valid state signatures before either serialized close path is treated as current.

CHANGED CONDITION

An outbound payment above Alice's balance, an unfundable close fee, or one corrupted party signature rejects the successor while the last fully authorized state remains enforceable.

Important distinction: Off-chain channel balances are ordinary Bitcoin UTXOs after every payment. The funding UTXO remains on chain. Updated balances are represented by enforceable off-chain transaction states until settlement.

Text equivalent: The accepted path is enforced by Every successor allocation must remain nonnegative, conserve the fixed channel capacity, and carry both parties' valid state signatures before either serialized close path is treated as current. If the required condition changes, An outbound payment above Alice's balance, an unfundable close fee, or one corrupted party signature rejects the successor while the last fully authorized state remains enforceable.

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Learn the idea

A payment channel locks bitcoin in an on-chain funding output and lets participants exchange new signed settlement states off chain. A commitment transaction is a pre-signed way to spend the funding output. Unilateral exit means one party can broadcast an enforceable state without the other's current cooperation.

GUIDED EXPLANATION1/5 ideas inspected

Create a funding output

Participants confirm a Bitcoin output controlled by the channel policy. Off-chain balances cannot exceed the value and conditions committed there.

The worked example follows the explanation

Inspect every idea above to open it.

Important distinction“Off-chain channel balances are ordinary Bitcoin UTXOs after every payment.”

The funding UTXO remains on chain. Updated balances are represented by enforceable off-chain transaction states until settlement.

FINISH LEARNING FIRST

The questions unlock after every required learning activity

Inspect every guided idea, open the worked example, rebuild its mechanism, and complete the deterministic lesson tool. Your progress is saved automatically.