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Off-chain

Each party keeps a state tree specific for the channel. It represents the channel state at a certain point of time. It consists of all the channel data: accounts and contracts. Since it has the same structure as the on-chain state tree, the names and oracles subtrees are empty as those are not allowed off-chain. The channels subtree is empty as well, as it is reserved for future use. Off-chain transactions update this channel auxiliary tree.

It is the responsibility of the parties to keep this locally. This is the safety guarantee in a case of a dispute: the solo closing path requires a proof of inclusion for subtree instead of posting the whole tree. Being able to provide this proof of inclusion allows a participant to dispute a malicious close by the other party or for basing a forced progress.

Each off-chain update consists of updates being applied on top of channel state tree as well with an integer value round representing when it happened. Since round must always be bumped, provided two off-chain transactions we can reason which was performed earlier than the other.

Messages

Overview

The protocol parties use to run smart contracts is a two-phase commit protocol, where one party proposes a change, gets it authenticated by the other and then commits the update locally. These checks are necessary to avoid parties getting confused if updates are being proposed simultaneously. On a higher level, to keep off-chain and on-chain state in sync, parties should refuse to authenticate updates for either without also getting an authentication for the updates state_hash, e.g. don't authenticate an on-chain channel_deposit transaction without also updating the channel state trees as well. Authentication method differences depending on whether the transaction is on-chain or off-chain one can be found here.

With the consistency of state updates being secured between parties, it is essential that parties make absolutely sure to not lose their local state, since it could potentially lead to them not being able to slash outdated states published on-chain.

Control messages

Framing

Each message is identified by a 1-byte message code. The size of the following message is defined by the type – see the description of each individual message type.

  name                  size (bytes)
 ---------------------- ----
| msg_type             | 1  |
 ---------------------- ----
| message              | .. |
 ---------------------- ----

The following message codes are defined: 

  type              code
-------------------------
| channel_open     | 1  |
| channel_accept   | 2  |
| channel_reestabl | 3  |
| channel_reest_ack| 4
| funding_created  | 5  |
| funding_signed   | 6  |
| funding_locked   | 7  |
| update           | 8  |
| update_ack       | 9  |
| update_error     | 10 |
| deposit_created  | 11 |
| deposit_signed   | 12 |
| deposit_locked   | 13 |
| deposit_error    | 14 |
| withdraw_created | 15 |
| withdraw_signed  | 16 |
| withdraw_locked  | 17 |
| withdraw_error   | 18 |
| leave            | 94 |
| leave_ack        | 95 |
| inband_message   | 96 |
| error            | 97 |
| shutdown         | 98 |
| shutdown_ack     | 99 |
-------------------------

error

Message code: 97

Explicitly communicating errors should make debugging easier. In order to avoid complex error handling, which tends to be prone to mistakes, once a channel returns an error, it MUST be considered unusable. As such, errors SHOULD be reserved for unrecoverable failures only.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| data                 |    |
 ---------------------- ----
  • channel_id: the temporary or final channel id
  • length: length of data field
  • (optional) data: relevant information

ping/pong

Sub-messages

The following serializations can be consistently used below.

Updates list

Progress off-chain is achieved by one participant proposing a set of updates to be applied on top of the last state as well as the next state that is produced. A single off-chain update's serialization has the following structure:

  name                  size (bytes)
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| data                 | N  |
 ---------------------- ----

The length is the size of the data field.

A list of updates is a appended list of 0 or more such updates.

Establishing channel off-chain

A (initiator)          B
|                      |
|---  channel_open  -->|
|<-- channel_accept ---|
|                      |
|-- funding_created -->|
|<- funding_signed  ---|
|                      |
|--- funding_locked -->|
|<-- funding_locked ---|
|                      |

In order to establish a channel both parties need to agree on the initial conditions, e.g. funding amounts, minimum reserve and lock time.

By default the initiator of the channel will pay the fee for the opening transaction.

channel_open

Message code: 1

This message initiates the opening of a channel and communicates the initiators' intent to a potential future party.

The channel_open message should provide the accepting party all the information it needs to assess whether or not it should accept the channel.

  name                  size (bytes)
 ---------------------- ----
| chain_hash           | 32 |
 ---------------------- ----
| temporary_channel_id | 32 |
 ---------------------- ----
| lock_period          | 2  |
 ---------------------- ----
| push_amount          | 8  |
 ---------------------- ----
| initiator_amount     | 8  |
 ---------------------- ----
| responder_amount     | 8  |
 ---------------------- ----
| channel_reserve      | 8  |
 ---------------------- ----
| initiator_pubkey     | 32 |
 ---------------------- ----
| responder_pubkey     | 32 |
 ---------------------- ----
  • chain_hash: genesis block hash of the chain you want to use
  • temporary_channel_id: randomly chosen id unique between the involved parties
  • lock_period: time measured in key blocks in which unilateral channel events can be disputed
  • push_amount: initial deposit in favour of the responder by the initiator
  • initiator_amount: amount the initiator is willing to commit
  • responder_amount: amount the initiator wants the responder to commit
  • channel_reserve: the minimum amount both parties need to maintain, amount of coins a party is to lose in case of acting maliciously
  • initiator_pubkey: the account that the initiator wants to use to open the channel
  • responder_pubkey: the account that the initiator expects as a responder on the channel

(TODO: what's the appropriate size for the amounts. Do we want to discourage channels from holding big amounts?)

(TODO: should the initiator send along fee and nonce as well so that the responder can assemble the channel_create themselves?)

In the future state channels might exist across different chains, at which point specifying a chain_hash will become meaningful.

The lock_period can be chosen freely. Setting it too high might lock up funds for too long in the case of non-cooperation and setting it too low could leave a party without enough time to react to a malicious party trying to unilaterally close a channel.

Having the ability to include a push_amount, which credits funds to the other party, simplifies the common case of wanting to open a channel and pay someone immediately. An exchange might want to send you funds via this mechanism, since it requires only one on-chain transaction and has the side effect of also opening a channel. If push_amount > 0 then the initiator should send along an authenticated update, assigning that amount to the responder, before sending the funding_created message.

A channel_reserve ensures that parties have something to lose in the case that they start acting maliciously. Enforcement of this rule must be done by the clients, which in practice means they should not authenticate any updates that end up violating this invariant.

Requirements

Initiator:

  • chain_hash MUST identify the chain to be used
  • temporary_channel_id MUST be unique between the involved parties
  • lock_period SHOULD be sufficient time to safely publish transactions to the blockchain to stop a cheater
  • push_amount MUST be less or equal to initiator_amount
  • initiator_pubkey MUST be a valid ed25519 pubkey

Responder MUST abort if:

  • chain_hash is unrecognised
  • initiator_pubkey not a valid ed25519 pubkey
  • temporary_channel_id is not unique between the parties

Responder SHOULD abort if:

  • initiator_pubkey does not have sufficient balance to cover initiator_amount

Responder MAY abort if:

  • lock_period is too small
  • push_amount is too small
  • channel_reserve is too large or small
  • responder_amount is too large
  • initiator_amount is too small

channel_accept

Message code: 2

This message is sent by the responding party. It is used to convey the conditions under which they are willing to accept the terms proposed by the initiating party.

  name                  size (bytes)
 ---------------------- ----
| chain_hash           | 32 |
 ---------------------- ----
| temporary_channel_id | 32 |
 ---------------------- ----
| minimum_depth        | 4  |
 ---------------------- ----
| initiator_amount     | 8  |
 ---------------------- ----
| responder_amount     | 8  |
 ---------------------- ----
| channel_reserve      | 8  |
 ---------------------- ----
| initiator_pubkey     | 32 |
 ---------------------- ----
| responder_pubkey     | 32 |
 ---------------------- ----
  • chain_hash: genesis block hash of the chain you want to use
  • temporary_channel_id: randomly chosen id unique between the involved parties,
  • minimum_depth: number of blocks until an opening transaction should be considered final. The minimum_depth is set by the responding party, since they will typically be the one providing a service. Note that a minimum_depth of 0 (zero) will result in a microblock confirmation (see below).
  • initiator_amount: amount the initiator is willing to commit
  • responder_amount: amount the initiator wants the responder to commit
  • channel_reserve: the minimum amount both parties need to maintain. This makes sure that both have to lose something in case they act maliciously
  • initiator_pubkey: the account that the initiator used to open the channel
  • responder_pubkey: the account that the responder used to open the channel

Requirements

Responder:

  • chain_hash MUST identify the chain to be used
  • temporary_channel_id MUST be unique between the involved parties
  • lock_period SHOULD be sufficient time to safely publish transactions to the blockchain to stop a cheater
  • responder_pubkey MUST be a valid ed25519 pubkey

Microblock confirmation

As outlined in this Bitcoin-NG blog post, an NG microblock offers strictly stronger guarantees than a 0-confirmation in Bitcoin. In æternity, when the minimum-depth confirmation is set to zero, the system will still wait until the transaction is seen inside a microblock. This will mean that the transaction has been gossiped, picked up from the mempool and accepted by a miner.

Note that high-value transactions should wait for a number of keyblocks in order to guard against forks reorganizing the chain, but a microblock confirmation offers at least a receipt of that the transaction was initially accepted.

channel_reestablish

Message code: 3

It is possible to resume a channel which has been terminated either due to client failure or by the participants mutually agreeing to leave.

  name                  size (bytes)
 ---------------------- ----
| chain_hash           | 32 |
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| data                 | N  |
 ---------------------- ----

The payload (data) must be the latest mutually authenticated offchain state, and the clients must verify that they have the corresponding state trees to match the state (otherwise, it will not be possible to use the channel later on.)

In the æternity node implementation, the state trees are cached inside the node. Note that if the node restarts, cached data is not likely to survive (it is not persisted on each update for performance reasons.) The æternity node channel FSM automatically recovers the state trees and verifies that the provided state is in fact the last mutually authenticated state.

Requirements

Responder:

  • MUST abort if the chain_id doesn't match the current chain.
  • MUST abort if the payload does not correspond to the last known mutually authenticated state.
  • MUST abort if it doesn't have a corresponding state tree (is able to verify proof-of-inclusion) for the provided state.

channel_reestablish_ack

Message code: 4

  name                  size (bytes)
 ---------------------- ----
| chain_hash           | 32 |
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| data                 | N  |
 ---------------------- ----

This is a response message to channel_reestablish, expected to contain identical information.

Requirements

Initiator:

  • MUST abort if contents do not match exactly, those of the preceding channel_reestablish
  • MUST abort if the chain_id doesn't match the current chain.
  • MUST abort if the payload does not correspond to the last known mutually authenticated state.
  • MUST abort if it doesn't have a corresponding state tree (is able to verify proof-of-inclusion) for the provided state.

funding_created

Message code: 5

In order to open a channel on chain, parties need to cooperate and mutually authenticate the channel_create transaction. The funding_created message is used by the initiator to send an initial state - a channel_create_tx object, authenticated by the Initiator. The block_hash specifies which on-chain environment was used to prepare the transaction ensuring both participants share a common view of the chain.

  name                  size (bytes)
 ---------------------- ----
| temporary_channel_id | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length of create tx  | 2  |
 ---------------------- ----
| channel_create tx    | N  |
 ---------------------- ----
| list of updates      |    |
 ---------------------- ----

Requirements

Responder:

  • MUST abort if the size of the serialized channel_create transaction does not match length
  • MUST abort if the data cannot be deserialized into a valid channel_create_tx object
  • MUST abort if the provided block_hash is not part of the main chain as the responder sees it or if one considers it too old
  • MUST abort if the authentication method used is invalid for the provided transaction data on the current top block
  • MUST abort if disagrees with updates provided

funding_signed

Message code: 6

If the responder was able to validate the initiator's authentication method sent in the funding_created message, then it should add its own authentication to the state object. The mutually authenticated object will become the initial off-chain state of the channel. Responder provides the block_hash to specify which on-chain environment was used for producing the signature or meta transaction.

  name                  size (bytes)
 ---------------------- ----
| temporary_channel_id | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| channel_create tx    | N  |
 ---------------------- ----

Requirements

Initiator:

  • MUST abort if the size of the channel_create transaction does not match length
  • MUST abort if the data cannot be deserialized into a valid channel_create_tx object
  • MUST abort if the data object isn't the offered initial state
  • MUST abort if the data object isn't mutually authenticated by both parties.
  • MUST abort if the block_hash is too old

funding_locked

Message code: 7

Opening a channel requires an on-chain transaction. This transaction needs to be included in a block and, since we only have probabilistic finality, be sufficiently confirmed, so that the probability of a chain re-organisation is negligible.

This message is exchanged by both parties to signal to each other that the above condition has been met from their point of view and only after both of them agree on this, can the channel be considered to be opened.

All subsequent messages must use the included channel_id instead of the temporary_channel_id.

  name                  size (bytes)
 ---------------------- ----
| temporary_channel_id | 32 |
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----

Requirements

  • A node MUST NOT send the funding_locked message unless the channel_create transaction has minimum_depth confirmations.

State update

State updates require consent of both parties.

Each update MUST have a strictly increasing round, which SHOULD start at 0 on channel initialisation.

Parameters:

  • channel_id:
  • balances:
  • state

update

Message code: 8

Once funding_locked messages have been exchanged, the channel enters the open state. Changes to the off-chain state can be effected by sending an update message. It consists of a single-authenticated off-chain transaction and a list of updates list containing the operations to be performed on the previous state. The state_hash of the off-chain transaction is the aggregated root hash of the resulting state trees after the updates had been applied. The receiver must verify that the state is the correct outcome, then return it, mutually authenticated, in an update_ack message.

The block_hash is the hash of which on-chain environment was used for computing the state and either this block or any more recent one could be used to validate the state. Signatures or Generic Account's meta transactions are checked according to the latest channel object persisted on-chain. If there are updates that are contact executions using on-chain data: the block of block_hash is being used for building a consistent state on each participant's side.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| channel_offchain tx  | N  |
 ---------------------- ----
| list of updates      |    |
 ---------------------- ----

update_ack

Message code: 9

In response to an update message, the receiving side validates that the received updates are indeed desired. Then one verifies that the operations listed in the updates list, applied to the most recent mutually authenticated state, results in a state tree corresponding to the state_hash in the transaction. If so, the state object is mutually authenticated, then returned as payload in an update_ack message. The block_hash denotes the the on-chain environment in which the authentication was done. The authentication method described in the latest channel on-chain persisted object must be used.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| channel_offchain tx  | N  |
 ---------------------- ----

update_error

Message code: 10

Since both sides may initiate an update request, it is possible that both may do so at roughly the same time. In particular, in the æternity node system, if an update request arrives while the FSM is waiting for its client to authenticate a new state update, it reverts both its own update attempt and the other participant's update request by sending an update_error message. The round element signifies the round of the fallback state, which must be the last mutually authenticated state. The receiver does not reply.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| round                | 4  |
 ---------------------- ----

deposit_created

Message code: 11

In order to deposit more funds into the channel, one party can initiate a deposit_created request. It consists of a single-authenticated channel_deposit_tx transaction as well as a list of updates. The transaction includes the state hash and round of the next off-chain state, after applying the updates on top of latest state.

Note that it is possible to deposit a zero amount, essentially making the operation an on-chain snapshot.

The receiving side verifies the operation and authenticate the state, returning it in an deposit_signed message.

The block_hash defines the block used for deposit creation and depositor's authentication method will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length of deposit tx | 2  |
 ---------------------- ----
| channel_deposit tx   | N  |
 ---------------------- ----
| list of updates      |    |
 ---------------------- ----

deposit_signed

Message code: 12

This is an acknowledgement of a preceding deposit_created message (see above). Upon receipt of a mutually authenticated state, the receiver verifies that it is indeed the state resulting from the proposed deposit operation. The channel_deposit_tx is then pushed to the chain, and the requested number of confirmations (minimum_depth) are awaited. Once confirmation has been received, a deposit_locked message is sent, with the hash of the channel_deposit_tx transaction. The block_hash defines at which block deposit had been mutually authenticated and the second authentication will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length of deposit tx | 2  |
 ---------------------- ----
| channel_deposit tx   | N  |
 ---------------------- ----

deposit_locked

Message code: 13

This message is sent upon receipt of a minimum_depth confirmation for a channel_deposit_tx transaction. The payload is the hash of the channel_deposit_tx transaction object. Once the message has been sent, the channel returns to the open state and the new off-chain state is useable.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| tx hash              | 32 |
 ---------------------- ----

deposit_error

Message code: 14

Since both sides may initiate a deposit_created request, it is possible that both may do so at roughly the same time. In particular, in the æternity node system, if a deposit_created request arrives while the FSM is waiting for its client to authenticate a new state update, it reverts both its own update attempt and the other participant's update request by sending a deposit_error message. The round element signifies the round of the fallback state, which must be the last mutually authenticated state. The receiver does not reply.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| round                | 4  |
 ---------------------- ----

withdraw_created

Message code: 15

In order to withdraw coins from the channel, one party can initiate a withdraw_created request. It consists of a single-authenticated channel_withdraw_tx and a list of updates. The transaction includes the state hash and round of the next off-chain state, after applying the updates. Note that it is possible to withdraw a zero amount, essentially making the operation an on-chain snapshot.

The receiving side verifies the operation and mutually authenticated the state, returning it in an withdraw_signed message.

The block_hash defines on which block the withdrawal had been created and the withdrawer authentication method will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length of withdrawal | 2  |
 ---------------------- ----
| channel_withdraw_tx  | N  |
 ---------------------- ----
| list of updates      |    |
 ---------------------- ----

withdraw_signed

Message code: 16

This is an acknowledgement of a preceding withdraw_created message (see above). Upon receipt of a mutually authenticated state, the receiver verifies that it is indeed the state resulting from the proposed withdrawal operation. The channel_withdraw_tx is then pushed to the chain, and the requested number of confirmations (minimum_depth) are awaited. Once confirmation has been received, a withdraw_locked message is sent, with the hash of the channel_withdraw_tx transaction. The block_hash defines on which block the withdrawal had been mutually authenticated and the second authentication method will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length of withdrawal | 2  |
 ---------------------- ----
| channel_withdraw_tx  | N  |
 ---------------------- ----

withdraw_locked

Message code: 17

This message is sent upon receipt of a minimum_depth confirmation for a channel_withdraw_tx transaction. The payload is the hash of the channel_withdraw_tx transaction object. Once the message has been sent, the channel returns to the open state and the new off-chain state is useable.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| tx hash              | 32 |
 ---------------------- ----

withdraw_error

Message code: 18

Since both sides may initiate a withdraw_created request, it is possible that both may do so at roughly the same time. In particular, in the æternity node system, if a withdraw_created request arrives while the FSM is waiting for its client to authentication a new state update, it reverts both its own update attempt and the other participant's withdraw request by sending a withdraw_error message. The round element signifies the round of the fallback state, which must be the last mutually authenticated state. The receiver does not reply.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| round                | 4  |
 ---------------------- ----

Other interaction

inband_message

Message code: 96

Inband messages are arbitrary messages sent between the channel participants. The payload must be limited to 65,535 bytes. The FSM must deliver an inband message immediately, and the receiver must process it (e.g. conveying it to the client) immediately, preserving the message ordering.

One possible use of inband messages could be to synchronize off-chain state updates, but any application is allowed.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| data                 | N  |
 ---------------------- ----

Channel closing

leave

Message code: 94

While it is possible to simply drop out of a channel and later reestablish it, the success of the reestablishing operation depends on the other party keeping the most recent copy of the state. The polite way to ensure this is to send a leave request. The receiving side is expected to respond with a leave_ack.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----

leave_ack

Message code: 95

This message is sent in response to a leave request. The sender may terminate its side once the message has been delivered. The receiver should wait for the leave_ack before it terminates.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----

shutdown

Message code: 98

In order to close the channel in an orderly fashion, a shutdown message is sent, passing a singly authenticated channel_close_mutual_tx transaction object as payload. The sender creates the channel_close_mutual_tx from the latest mutually authenticated state, including the root hash of the corresponding state tree. The receiver must verify that the payload corresponds to its latest mutually authenticated state, and then replies with a shutdown_ack message. The block_hash defines on which block the close mutual had been created and the closer's authentication method will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| close mutual tx      | N  |
 ---------------------- ----

shutdown_ack

Message code: 99

This message is sent in response to a verified shutdown message. The sender may close once the message has been delivered. The receiver must, after verifying the payload of the shutdown_ack message (which must be the same channel_close_mutual_tx object, mutually authenticated), push the channel_close_mutual_tx transaction onto the chain, and then terminate. The block_hash defines on which block the close mutual had been mutually authenticated and the second authentication method will be according to the latest on-chain persisted account and not the on-chain persisted channel object.

  name                  size (bytes)
 ---------------------- ----
| channel_id           | 32 |
 ---------------------- ----
| block_hash           | 32 |
 ---------------------- ----
| length               | 2  |
 ---------------------- ----
| close mutual tx      | N  |
 ---------------------- ----

Channel closing

A channel can be closed under three circumstances:

  1. Both parties agree to the close and authenticate the closing transaction together, which then gets broadcasted and included in the blockchain.
  2. One party wants to close the channel: the other party might had been missing for some time or had been trying to cheat. In this case either side can publish the latest state authenticated by both parties and claim their balance after the negotiated timeout.
  3. A malicious party tries to publish an outdated state, which it prefers over a later state. In this case the honest party can publish a state authenticated by both with a higher round and thereby prove that the other one is trying to cheat. A transaction with a higher round overwrites the one with a lower one.

In the case that both parties decide to close the channel, funds are accessible immediately after the transaction of their agreement is included in a block, otherwise they have to wait at least lock_period blocks for disputes.

A                       B
|                       |
|----   shutdown    --->|
|<---   shutdown    ----|
|          .            |
|          .            |
|  resolve pending op   |
|          .            |
|          .            |
|          .            |
|<-- closing_created ---|
|--- closing_signed  -->|
|                       |

In case of both parties want to close the channel in agreement and there are enough coins left in the channel to pay for the fee, then the the advised distribution of returning the coins left in the channel is as follows:

if initiator_amount + responder_amount < fee
  return error
else if initiator_amount >= ceil(fee/2) && responder_amount >= floor(fee/2)
  initiator_final := initiator_amount - ceil(fee/2)
  responder_final := responder_amount - floor(fee/2)
else if responder_amount >= ceil(fee/2) && initiator_amount >= floor(fee/2)
  responder_final := responder_amount - ceil(fee/2)
  initiator_final := initiator_amount - floor(fee/2)
else if initiator_amount > responder_amount
  initiator_final := initiator_amount - fee + responder_amount
  responder_final := 0
else
  responder_final := responder_amount - fee + initiator_amount
  initiator_final := 0
  ```

This is an example distribution of the fee. If this is to be accepted as a
norm - it means that one of the parties will propose these final amounts in the
closing transaction and the other, also following this advise, will
happily authenticate it.
What ends up on-chain is the fee and the closing amounts of
the parties. The process by which they got to agreement is not part of the
protocol itself.


### `shutdown`
name size (bytes)

| channel_id | 32 |

```

The shutdown message initiates the closing of a channel and can be sent by either party. After a party sends the shutdown message, it MUST NOT propose any more update messages.

Requirements

A shutdown cannot be initiated before the on-chain channel opening is authenticated.

The initiator MUST NOT send a shutdown before a funding_created and the responder MUST NOT send a shutdown before a funding_signed has been sent. Prior to the respective points parties can still safely abort the procedure without having committed to anything.

closing_created

If the parties agree to a shutdown then they both need to authenticate the channel_close_mutual transaction

closing_signed

Local state

Parties need to store local state in order to be able to keep track of state channel operations.

  • chain_hash
  • initiator_pubkey
  • responder_pubkey
  • initiator_amount
  • responder_amount
  • channel_active
  • round
  • updated_at
  • closed
  • [{}]

Contracts

Execution of a contract inside a state channel requires parties to be able to initialise a virtual machine to run their smart contracts in.

Contracts are executed in rounds, which are denoted by round attribute.

Every party executes each smart contract locally and checks if the authenticated state they receive match up with theirs. In the case that state and authentication are valid, they apply the update and then send out their own authentication. If there was an error in either the execution of the contract or the authentication failed, they send a new update with the prior state but an increased round number—to avoid confusion–and their authentication method over it, to signal that something went wrong.

When operating in mutually authenticated mode, contracts might need to be written in a way to avoid the free option problem.

On-chain enforcement

  • submit code, state, inputs
  • code should output new distribution of balances?
  • submit a hash of what is expected to be the root of the new state
  • parties could choose to continue from there

With on chain enforcement of contracts it becomes possible to unilaterally force progress by publishing contract, state and input on chain. A miner would then execute the contract given the state and inputs to produce a new state. This new state could then either be used for both parties to continue operation from there or leave it at that.

Contracts lifecycle

Contracts are part of the update mechanism: it is different updates that are being used. Serialization of those can be found here.

First one participant initiates an update round containing a channel create contract update. It contains all the information needed for a contract creation. The other participant authenticates the changes and the contract is considered to be created.

After a contract is created it can be called. For this one of the participants initiates an update round containing a channel call contract update. It contains all the information needed for a contract call, including the contract address. The other participant authenticates the changes and the contract call is considered to be executed. Its results can be extracted from the calls tree in the state tree. Part of the call is the amount a participants commits to the contract. This is not to be confused with gas consumption - amount are the coins moved from the caller's off-chain balance to the off-chain balance of the contract been called.

Contracts referring to on-chain data

Contracts being used in channels off-chain calls have the exact same semantics as those being used on-chain. Because of the different environment however, off-chain calls might have different results as the on-chain ones.

Since there is no single source of truth, each participant considers their current view of the chain to be the correct one. This is essential for the trustless environment. Every off-chain contract call is based on the top of the chain, as it is seen by each participant. This could cause some differences in local contract executions. If those can not be resolved, participants can always rely on the blockchain as an arbiter by using forcing of progress. Then the top is used as it is seen by the Bitcoin-NG leader.

It is worth mentioning that both local contracts' executions and the forced progress ones must be fully deterministic and this implies some restrictions on using on-chain objects in the off-chain contracts. This is especially true for the chain-related primitives (e.g. coinbase, timestamp, block height, difficulty). Please refer to the documentation of the applicable VM version. Registration and updates of names or asking of oracles is impossible in the off-chain contract calls.

Using on-chain contracts in off-chain ones is a tricky task. On-chain contracts reference-count contracts that refer to them. They can be deleted from the blockchain only once they are no longer referenced by any other contract. This can not be enforced for off-chain contracts because there is no knowledge of them on-chain. Also if we were to use an on-chain contract referencing it by a registered name, the name on-chain could be changed to point to another different contract. This opens a security hole especially if one of the participants is in control of the name. For these reasons off-chain contracts are not allowed to use on-chain ones, not even stateless on-chain contracts. Participants can still use well-known contracts that are present on-chain but they have to copy them into their off-chain state. That way participants take care of their own data in a trustless manner - they don't have to rely on other entities keeping contracts on-chain for them.

Gas consumption

While making off-chain updates that both parties authenticate, no gas is being consumed. It is worth mentioning that although contract call updates do include values for the gas limit and the gas price, those are ignored. Assumption is that since both participants are executing the contracts locally, they are equal in their energy consumption.

When a dispute arises and a contract is to be called on-chain, the miner that includes the transaction should be compensated for the energy used. That's why when forcing progress of off-chain contract calls gas is consumed. Gas limit and gas prices are specified in the contract call update itself. Now the values not being used off-chain come into play. Since the force progress is an unilateral act, it is the forcer that specifies them and it is the forcer's on-chain balance that is paying for the consumed gas.