Bidirectional channel
A bidirectional payment channel is a type of multi-signature address (type 2 of 2) smart contract which allows two users to exchange bitcoin off-chain via the Lightning Network.
If Steve and Amy want to set up a channel, they must both fund the 2 of 2 multi-sig address (channel) with an equivalent amount of bitcoin. 2 of 2 multi-sig addresses require both parties to agree on the amount coming in and out of the channel. That is, both parties must sign the transaction with their private keys.
So, when Steve and Amy send 0.25 BTC each into their bidirectional channel, the total amount in the channel equals 0.5 BTC. To remove the funds within the channel, they both have to agree on how much funds get pulled out of the channel and the new address to where the funds will go. This is the fundamental building block of how Lightning Network transactions work, moving funds from peer-to-peer with multi-signature wallets.
The most common way for consumers to interface with a bidirectional payment channel is with a Lightning Network enabled Bitcoin wallet. These wallets maintain the private and public keys like a normal Bitcoin wallet, but are specially set up to handle Bitcoin Lightning Network transactions and bring funds on and off the Bitcoin blockchain.
NOTE: If one party loses their private keys, then the funds inside the payment channel are lost forever. Luckily, most non-custodial Lightning network wallets have a back-up seed phrase option. Custodial Lightning network wallets have the private keys stored within the app to reduce risk of this occurring.
Links
- Understanding the Lightning Network, Part 1: Building a Bidirectional Bitcoin Payment Channel – Bitcoin Magazine
- The Bitcoin Lightning Network: Scalable Off-chain Instant Payments – Lightning.network