Payment Channel
Quick Answer
A payment channel allows multiple off-chain transactions between two parties, with only opening and closing settled on-chain — enabling micro-payments at near-zero cost.
Full Definition
A payment channel is an off-chain mechanism that allows two parties to conduct multiple transactions without recording each one on the blockchain. Only the opening and closing transactions are settled on-chain, drastically reducing fees and increasing throughput. The Lightning Network (Bitcoin) and state channels (Ethereum) are payment channel implementations. They enable micro-payments and high-frequency transactions that would be prohibitively expensive on-chain.
Related Terms
Payment Gateway
A payment gateway facilitates the transfer of payment information between customer, merchant, and processor. Crypto payment gateways replace traditional card networks with faster, cheaper blockchain rails.
Peer-to-Peer (P2P)
Peer-to-peer means direct interaction between parties without an intermediary. Blockchain payments flow directly from sender to receiver without a bank in the middle.
Private Key
A private key is a cryptographic secret giving full control over a blockchain address. Anyone with the private key can move all funds — losing it means permanent loss of access.
Proof of Stake (PoS)
Proof of Stake is a consensus mechanism where validators stake crypto as collateral, offering faster blocks and lower fees than Proof of Work — critical for payment processing.
Proof of Work (PoW)
Proof of Work is a consensus mechanism where miners solve computational puzzles to validate transactions. Used by Bitcoin, it is secure but slow (10-minute blocks).
Public Key
A public key is the cryptographic counterpart to a private key, used to derive wallet addresses and verify transaction signatures. It can be shared openly.