A New Second Layer: Channel Factories

Lately, there’s been a lot of discussion about a new concept called ‘Channel Factories.’ The technology ultimately makes the Lightning Network (LN) a ‘third layer’ and a ‘new layer’ rests in between the bitcoin blockchain and LN payment channels.

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Channel Factories: Adding Another Layer to the Lightning Network

Last November three developers Conrad Burchert, Christian Decker, and Roger Wattenhofer published a paper called “Scalable Funding of Bitcoin Micropayment Channel Networks” which introduced the idea called ‘channel factories.’ In essence, the concept proposes to create a ‘Masterchannel’ which in turn allows LN users to open sub-channels in between. Users sub-channels can be opened and closed while the ‘masterchannel or factory’ remains open.

“In short, channel factories are payment channels that can be used to create more payment channels — That sounds weird, but it’s really pretty simple,” explains the software developer David Harding.

Since the initial payment channel (channel factory) already has sufficient confirmations, opening the secondary payment channels is instant. The second payment channels can then be used like normal payment channels (e.g. for routable payments Lightning Network) except that when it comes time to close them.

Channels Factories Could Theoretically Save Blockchain Space

Ordinary payment channels are useful for individuals and entities with a lot of cryptocurrency liquidity or two parties who often transact together. Channel factories will make regular channels more efficient, and theoretically, the concept may save blockchain space and even more space if developers applied signature aggregation.

“Three party channel factories save 50% of the blockchain space,” details the micropayment channel network white paper.

In a setting of 20 users with 100 channels between them, 90% reduction is achieved — In a Bitcoin system with signature aggregation, those numbers improve even more to 62% and 96% respectively.

Some People Like the Channel Factory Concept While Others Believe It Moves the Scaling Goal Post

The paper also explains that payment channel won’t appear in the blockchain unless there was a dispute. “Users will be able to enter the system with one blockchain transaction and then open many channels without further blockchain contact — Funds are committed to a group of other users instead of a single partner and can be moved between channels with just a few messages inside this collaborating group, which reduces the risk, as an unprofitable connection can be quickly dissolved to form a better connection with another partner,” the report reveals.

“The channels created inside these groups work in the same way as regular micropayment channels,” the researchers add.

Therefore members of such a group can forward payments over a larger payment network of regular channels, founded either directly on the blockchain or within other groups. This property enables easy deployment in an existing payment network.

Lightning Network supporters like the idea of channel factories, and LN technology has been researched and developed heavily over the past few months. Those who dislike the purpose of this particular second layer concept believe that this latest idea pushes the LN technology even further behind because it’s essentially pushing the protocol to a third layer solution.

What do you think about the idea of channel factories becoming a second layer while LN becomes a third layer? Let us know your thoughts on this technology in the comments below.

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