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2.7.3 CHAINING STATE CHANNELS

State channels can be chained to enable payments 

to additional parties. If Alice wishes to pay Carol, 

and both Alice and Carol have a channel with Bob 

but not with each other directly, then the transfer 

from Alice to Carol can flow through Bob and then 

on to Carol without requiring Alice and Carol to 

open a direct channel. To chain state channels in 

this manner, the system must enforce assurance 

that when Alice pays Bob, that Bob will in turn pay 

Carol and that Bob cannot retain the funds himself.

This is accomplished through the use of a hashed 

time locked contract (HTLC), which makes executing 

the chained payment as secure as executing it 

through a normal direct state channel. A chain 

of states is established in which the funds will be 

released if and when the recipient can produce a 

secret. The final recipient is then given the secret, 

which they pass up the chain, and everybody in 

the chain can use the secret to claim the funds.

In this example, Alice gives Bob a new state that 

essentially states: “if you can produce the preimage 

that will produce this hash, then you can receive the 

funds.” Bob then produces a similar state with Carol. 

Alice then gives Carol the preimage. Carol uses 

that preimage to retrieve the funds from Bob, and 

then Bob uses that to retrieve the funds from Alice. 

Since the HTLC is enforced by the state channel, if 

one party attempts to steal the funds then the other 

party can broadcast a transaction with the HTLC and 

the preimage, which will direct the funds to them.