Funding and settling protocols

Defintions of asset, funding and settling:

Asset: An asset can be any valid token on a given blockchain platform. For example, on Ethereum, it could be ETH, any ERC20 token or any other token. A channel can have one or more assets and channel balances will be defined for each asset.
Funding: Locking the agreed amount, for each asset, from each of the participant accounts on the parent layer against the channel ID.

In case of a ledger channel, the agreed amount can be different from the initial balance of the channel. For instance, if Alice and Bob want to open a channel with balances 4 ETH and 6 ETH respectively, they could still agree to deposit 5 ETH each. The only condition here is that, for each asset, the sum of amounts in the opening balance must be equal to the sum of amounts in the funding agreement.

In case of sub-channel and virtual channels, the funding agreement is the same as the opening balance.
Settling: Concluding a channel and withdrawing funds from it. See the section on Settle phase phase for detailed explanation.

Ledger channel

Funding protocol

A ledger channel is funded by depositing funds from on-chain accounts into the smart contract using the funding ID as reference.

Any on-chain account can be used for depositing funds, as long as the funding ID (a function of channel ID and the participant’s address in the ledger channel) is specified. The amounts can be sent in one or more transactions.

For instance, if Alice and Bob want to open a ledger channel with balances 4 ETH and 6 ETH respectively and have made a funding agreement same as opening balance; then Alice can send 4 ETH in two transactions (of 2 ETH each) and Bob can send 6 ETH in one transaction.

The channel will be considered funded when each of participants have deposited at least the amounts corresponding to the agreed amount for each asset. If they send more than their agreed amount, the extra funds will be locked in the channel forever and can never be withdrawn, even after settling the channel.

Note

Fund channel in the below diagram represents the participant depositing their agreed amounts. This in itself could be one or more transactions, from same or different on-chain accounts.

Settling protocol

A ledger channel must be concluded before funds can be withdrawn. To conclude a ledger channel, any one of the participants can conclude, using a state that was finalized either through off-chain transaction or on the blockchain. After the channel is concluded, participants can withdraw the amount corresponding to their address in the balance of the concluded state back to any on-chain account. The on-chain account must be specified in the withdraw call and the authorization must be signed using the keys corresponding to the participant’s off-chain address in the channel.

The participant could also withdraw their amount in multiple parts, to different on-chain accounts, as long as the authorization is signed by the participant in each call. On each call, the withdrawn amount will be subtracted. Withdraw calls would succeed as long as the amount remaining is greater than or equal to the amount in the withdraw call.

Note

Withdraw from channel in the below diagram represents the participant withdrawing their entitled amounts. This in itself could be one or more transactions, withdrawing to same or different on-chain accounts.

Sub-channel

Funding protocol

A sub-channel is funded by sending an off-chain transaction on the parent ledger channel, that locks the funds corresponding to the opening balance of the sub-channel. This update must be sent by the participant that proposed the channel and the proposee must wait for it.

Settling protocol (when finalized off-chain)

If a sub-channel was finalized through an off-chain transaction, then it can be settled by sending a single update on the parent ledger channel. This update will redistribute the locked funds as per the balance in the finalized state, unlock them and move them back to pariticipants’ accounts on the parent ledger channel. This update must be sent by the participant that proposed the channel and the proposee must wait for it and then accept it.

Settling protocol (when not finalized off-chain)

If a sub-channel was not finalized through off-chain transaction or settling it through off-chain update fails, then it must be finalized and settled on the blockchain. See Settling on the blockchain section in settle phase for more details.

Virtual channel

Funding protocol

A virtual channel is funded by sending two off-chain transactions. One transaction on each of the the parent ledger channels between the common intermediary and each of the participants.

Intermediary will be notified of this update. If they accept it, the channel will be funded. If they reject, funding will fail.

Settling protocol (when finalized off-chain)

If a virtual channel was finalized through an off-chain transaction, then it can be settled by sending two updates: one on each of the parent ledger channels. This update will redistribute the locked funds as per the balance in the finalized state, unlock them and move them back to pariticipants’ accounts on each parent ledger channel. This update should be sent by each of the channel pariticipants to the common intermediary. The common intermediary will approve it only when both the updates match with each other.

Settling protocol (when not finalized off-chain)

If a virtual channel was not finalized through off-chain transaction or settling it through off-chain update fails, then it must be finalized and settled on the blockchain. See Settling on the blockchain section in settle phase for more details.