Current permissionless cryptocurrencies such as Bitcoin suffer from a limited transaction rate and slow confirmation time, which hinders further adoption. Payment channels are one of the most promising solutions to address these problems, as they allow the parties of the channel to perform arbitrarily many payments in a peer-to-peer fashion while uploading only two transactions on the blockchain. This concept has been generalized into payment channel networks where a path of payment channels is used to settle the payment between two users that might not share a direct channel between them. However, this approach requires the active involvement of each user in the path, making the system less reliable (they might be offline), more expensive (they charge fees per payment), and slower (intermediaries need to be actively involved in the payment). To mitigate this issue, recent work has introduced the concept of virtual channels (IEEE SP'19), which involve intermediaries only in the initial creation of a bridge between payer and payee, who can later on independently perform arbitrarily many off-chain transactions. Unfortunately, existing constructions are only available for Ethereum, as they rely on its account model and Turing-complete scripting language. The realization of virtual channels in other blockchain technologies with limited scripting capabilities, like Bitcoin, was so far considered an open challenge.In this work, we present the first virtual channel protocols that are built on the UTXO-model and require a scripting language supporting only a digital signature scheme and a timelock functionality, being thus backward compatible with virtually every cryptocurrency, including Bitcoin. We formalize the security properties of virtual channels as an ideal functionality in the Universal Composability framework and prove that our protocol constitutes a secure realization thereof. We have prototyped and evaluated our protocol on the Bitcoin blockchain, demonstrating its efficiency: for n sequential payments, they require an off-chain exchange of 9+2n transactions or a total of 3524+695n bytes, with no on-chain footprint in the optimistic case. This is a substantial improvement compared to routing payments in a payment channel network, which requires 8n transactions with a total of 3026n bytes to be exchanged.

Decentralized and permissionless ledgers offer an inherently low transaction rate, as a result of their consensus protocol demanding the storage of each transaction on-chain. A prominent proposal to tackle this scalability issue is to utilize off-chain protocols, where parties only need to post a limited number of transactions on-chain. Existing solutions can roughly be categorized into: (i) application-specific channels (e.g., payment channels), offering strictly weaker functionality than the underlying blockchain; and (ii) state channels, supporting arbitrary smart contracts at the cost of being compatible only with the few blockchains having Turing-complete scripting languages (e.g., Ethereum). In this work, we introduce and formalize the notion of generalized channels allowing users to perform any operation supported by the underlying blockchain in an off-chain manner. Generalized channels thus extend the functionality of payment channels and relax the definition of state channels. We present a concrete construction compatible with any blockchain supporting transaction authorization, time-locks and constant number of Boolean ∧ and ∨ operations – requirements fulfilled by many (non-Turing-complete) blockchains including the popular Bitcoin. To this end, we leverage adaptor signatures – a cryptographic primitive already used in the cryptocurrency literature but formalized as a standalone primitive in this work for the first time. We formally prove the security of our generalized channel construction in the Universal Composability framework. As an important practical contribution, our generalized channel construction outperforms the state-of-the-art payment channel construction, the Lightning Network, in efficiency. Concretely, it halves the off-chain communication complexity and reduces the on-chain footprint in case of disputes from linear to constant in the number of off-chain applications funded by the channel. Finally, we evaluate the practicality of our construction via a prototype implementation and discuss various applications including financially secured fair two-party computation.