The funding output anchors the channel
Opening creates an on-chain funding transaction whose output is controlled under the negotiated channel type. Until that output is spent, balance changes can occur by exchanging signatures off chain.
Capacity is the bitcoin locked in the output, while directional liquidity changes. A party can send only what is available on its side; receiving requires usable liquidity in the opposite direction.
Each party holds a commitment
A commitment transaction spends the funding output and allocates the current state. Each side holds a version it can publish unilaterally, so scripts and keys are intentionally asymmetric.
Updates exchange new signatures before revoking the preceding state. Message order matters: neither party may be left without a valid close, or with two advantageously publishable states.
An HTLC combines hash and time
A Hashed Time-Locked Contract pays one branch when the payment-hash preimage is revealed before a deadline and permits a return path later. The same hash across hops gives the routed payment an atomic outcome.
Each intermediary uses a shifted CLTV expiry so that, after learning the secret, it has time to claim its incoming payment on chain if needed. An HTLC is a set of transaction conditions and protocol messages, not an autonomous legal contract.
An old state must be dangerous
In classic penalty channels, broadcasting an obsolete state exposes a delayed output to a counterparty holding its revocation secret. That party must notice and act within the relative timelock, or safely delegate monitoring.
A cooperative close uses an agreed settlement. A force close publishes the latest commitment and can require delays, extra on-chain transactions and fees. Channel recovery therefore depends on the implementation's state and backup model, not merely a seed phrase.