With hierarchical channels, Lightning can overcome its scalability limitations by enabling fast and flexible off-channel resizing of channels.
Developers are exploring the use of hierarchical channels to accelerate and make the Lightning Network (LN) more scalable. Hierarchical channels enable flexible off-chain resizing of channels, enabling fast and cheap resizing without on-chain transactions that add delays and costs. On the other hand, resizing channels on-chain can cause delays of several months and increase costs. Current off-chain channel resizing proposals involve creating a channel factory or CoinPool and swapping capacity between channels within the same factory or pool. Hierarchical channels allow for flexible off-chain scaling of channels without requiring capacity swapping within a limited group of users. Hierarchical channels allow the creation of a two-party channel with two primary outputs, one per party, plus zero or more Hashed Time-Locked Contract (HTLC) outputs.
Each output from a hierarchical channel funds another channel which can be thought of as the root of an off-chain output tree where the leaves are owned by unique users. Parties can use a hashed time lock contract (HTLC) to trade bitcoins, linking their HTLC to HTLCs in other (potentially hierarchical) channels, thus making payments on the LN.
With hierarchical channels, the developers propose to solve two problems. First, it enables flexible, near-instantaneous, off-chain scaling, which is similar to the Lightning Network’s goal of enabling near-instantaneous off-chain payments. Second, hierarchical channels could be used by casual users who can send and receive bitcoins without a watchtower while dedicated users can use their full channel capacity to route payments even when the casual user is idle. Hierarchical channels would allow casual users to operate without a watchtower without locking up any capital.
Implementing hierarchical channels could help overcome one of the biggest limitations of the Lightning Network, namely its scalability. Hierarchical channels are expected to provide the support needed for efficient Lightning Network payments without introducing additional delays, increasing costs, and limiting scalability. Developing hierarchical channels does not require any changes to the underlying Bitcoin protocol.
The developers propose that hierarchical channels are an effective way to enable flexible, off-chain resizing of channels within the Lightning Network. The ability to scale channels quickly and efficiently will allow the Lightning Network to continue to evolve and meet the growing demand for more efficient payment channels.