Raiden Network is building a second-layer payment solution for the Ethereum blockchain. The project builds off the same technological innovations pioneered by the Bitcoin Lightning Network by facilitating transactions off-chain, but focuses on support for all ERC-20 compliant tokens. Participants will transaction directly through payment channels without needing to settle transactions on the blockchain, helping to avoid bottlenecks related to processing numerous and often small payment transactions. Users hedge themselves against counterparty risk by swapping cryptographic "promissory notes" that can be pushed to the Ethereum blockchain if circumstances require. Invalidation of previous notes when new ones are created prevents any party from gaming the system.
At first, the system might not be very appealing unless two participants plan to remunerate very frequently, since opening a new channel requires locking up assets via an on-chain broadcasted transaction. To alleviate this, the team plans to integrate the ability to route channels deterministically through multiple parties. Users having unique channels with many participants means less money in their wallets for discretionary spending, significantly reducing the versatility of their funds. Raiden plans to alleviate these concerns by introducing an effective pathfinding algorithm between network participants. If the relationship between users is extremely isolated, the system can keep introducing more intermediaries to form a lineage robust enough to facilitate payments.
The network plans to use the Raiden Network token (RDN) to transmit payments more conveniently for end users, while simultaneously offering incentive structures for liquidity providers and full node operators. While the token is not a functional requirement for the system, the team hopes it can provide incentives for network participants. For example, light clients that don't want to run full stack nodes can send small fees in the form of RDN to peripheral service providers (i.e. pathfinding and monitoring services) as compensation for utilizing their infrastructure. The token's primary utility will be for these pathfinding and monitoring services. By design, participants area incentivized to relay these peripheral fees using RDN (compared to Ether or other ERC-20 tokens) due to lower transaction costs.
Raiden utilizes signed data commitments, referred to as balance proofs, to achieve cryptographic security of transactions. The process starts when two parties initiate an opening transaction by depositing tokens to a multi-signature escrow. The process collateralizes the channel and once collateralized, the parties can transact infinitely in both directions, so long as the balance between the two parties at a given time sums to the balance of the originating deposits.
Each new transaction in a payment channel is unique, and each message creates obligations the recipient must fulfill to redeem the funds. Transactions are always locked in the contract until an arbitrary date and the closing can be initiated by either party whenever. The time it takes to close a channel is a block amount, chosen by the participant who opened the channel. When the two parties advance the state of the channel by signing a new transaction, they also relinquish a secret key that invalidates the previous state. There's no procedure to financially punish dishonest participants, however its mitigated in the form of Monitoring services as well as consensus nodes no longer opening channels with dishonest nodes. It is possible for a participant to cheat if the channel partner goes offline without using a Monitoring service.
Raiden builds off this escrow-like process by applying the rules to a chain of participants, introducing events called multihop or Hash Time Lock transfer. Multihop transfers can create a network of payment channels, which connect any two parties looking to transact, without needing to have a direct channel established between the parties themselves. In this case, inter-channel funds are deposited in hash-locked smart contracts from the payee, through the chain of intermediaries, to the payer. A payee then sends a "secret" hashed message to the payer. Redemption of the funds occurs in the reverse direction with the payee identifying funds waiting in escrow after the last multihop transfer and releasing the secret message to the intermediary liquidity provider. Releasing the secret catalyzes two reactions. First, it allows the payee to claim the funds out of the escrow and second, the receipt allows the correspondent to claim the money sitting in escrow. This process continues down the line until every intermediary has been paid, ensuring security across each leg of the channel and an incentive for each intermediary to pass along the cryptographically secured package.