Channel Factories take the best attributes of the Lightning Network and amplifies those capabilities through the use of group payment channels. This remarkable upgrade may help future Lightning Network users avoid scalability issues as mass scale adoption increases. For now, the concept boasts many undeniable benefits.
Problems with Bi-directional Channels
To understand the importance of Channel Factories, you must first understand how the Lightning Network functions. When an individual wants to utilize the Lightning Network, they must first open a payment channel. When a Lightning Network channel is opened it’s encoded onto the blockchain.
Opening a payment channel requires funding the channel with Bitcoin first. Once the channel is funded, there are other considerations that must be considered. For one, all transactions are limited to the amount of Bitcoin held in the channel. Additionally, this balance requires constant updating. Also, these Bitcoin funds are locked u until the channel is closed. Once the channel is closed it again encodes on Bitcoin’s blockchain.
While the Lightning Network greatly reduces the amount of congestion on the blockchain, it still does require two blockchain transactions. Once when the channel opens, and again when the channel closes. These transactions could eventually be so frequent that they too cause blockchain congestion.
Another issue encountered by current Lightning Network users is rebalancing. Rebalancing is the updating of the channel’s Bitcoin balance. Problems arise when a rebalance ends with one side unevenly funded. This can leave the other channel participant in a position where they are unable to send funds.
How Channel Factories Work to Eliminate These Concerns
Channel Factories eliminate these problems through the use of group payment channels. Users gain the ability to share the channel balance. This eliminates the need for every Lightning Network channel to be pre-funded to the total amount of the transactions. This strategy allows for more channels to operate simultaneously.
Channel Factories reduce the dependency of the Lightning Network on Bitcoin’s blockchain by eliminating the need for every channel to encode on the blockchain during opening and settlement. Instead, Channel Factories pass the data on to other members of the group. The data doesn’t have to be encoded on the blockchain until the group channel closes. This feature is critical in a future where billions of people utilize the Lightning Network.
Hook Transactions are a critical part of Channel Factories. These transactions are the primary deposited funds. Hook transactions allow users to share the total channel balance between all members of the group. When users leave the group they are able to withdraw their funds independently.
Channel Factories – Building a Better Lightning Network
Channel Factories aren’t perfect yet, but the concept is solid. The developers behind the project, Conrad Burchert, Christian Decker, and Roger Wattenhofer, are all well-known LN advocates. Their experience and guidance have been critical in ushering in the age of the Lightning Network. This latest project is just another chapter in their LN legacy.