With hierarchical channels, Lightning may overcome its scalability limitations by enabling quick and flexible off-chain resizing of channels.

Developers are exploring the use of hierarchical channels to help speed up and make the Lightning Network (LN) more scalable. Hierarchical channels allow for flexible off-chain resizing of channels, enabling quick and cheap resizing, without on-chain transactions which add delays and costs. In contrast, resizing channels on-chain can cause delays of several months and increases fees. The current proposals for resizing channels off-chain involve creating a channel factory or CoinPool and exchanging capacity between channels within the same factory or pool. Hierarchical channels allow for flexible off-chain resizing of channels without requiring an exchange of capacity within a limited pool of users. The hierarchical channels enable the creation of a two-party channel with two main outputs, one per party, plus zero or more Hashed Time-Locked Contract (HTLC) outputs. 

Each output from a hierarchical channel funds another channel that can be viewed as the root of an off-chain tree of outputs where the leaves are owned by single users. The parties can use a hashed timelock contract (HTLC) to exchange bitcoin, linking their HTLC to HTLCs in other (potentially hierarchical) channels, thus making payments over the LN.

With hierarchical channels, developers are proposing to solve two problems. Firstly, it allows for flexible resizing, near-instantly and off-chain, which is similar to the Lightning Network’s aim of allowing for near-instant off-chain payments. Secondly, hierarchical channels could be used by casual users who can send and receive bitcoin in a watchtower-free manner while the dedicated users can use all of their channel capacity to route payments, even while the casual user is inactive. Hierarchical channels would enable casual users to operate in a watchtower-free manner without stranding any capital.

The implementation of hierarchical channels could help overcome one of the biggest limitations of the Lightning Network, which is its scalability. It is expected that hierarchical channels would provide the necessary support for efficient Lightning Network payments without introducing additional delays, adding costs, and limiting scalability. The development of hierarchical channels does not require any changes to the underlying Bitcoin protocol.

Developers are proposing that hierarchical channels are an effective way of enabling flexible and off-chain resizing of channels within the Lightning Network. The ability to resize channels quickly and efficiently will enable the Lightning Network to continue to scale and meet the increasing demand for more efficient payment channels.

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