In this document, we explain how the standardized exit format facilitates a Nitro protocol optimization. Before explaining the optimization, we'll guide the reader through the complicated part of a virtual channel construction. Now, virtual channels are a meaty construct, so we first motivate virtual channels by considering how we could build payments for file torrenting.

Say Alice opens Web3Torrent, and wants to download a file. There are many (untrusted) peers that each have a piece of the file. Alice will establish a short-term relationship with each of these peers to download and pay for the peer's piece. To pay for each piece, Alice will stream micro payments to a seeder, Bob, in return for small sections of a file piece. After a piece is downloaded and paid for, Alice may never need to interact with the peer again.

How can Alice use Ethereum to pay for a torrent? Using L1 transactions is non-starter due to speed and cost. Rollups are still relatively slow and expensive for this use case since every Alice-to-peer micro payment will need to be sent to a sequencer and every transaction is included in L1 calldata. Basic state channels are a good start, but, for Alice to start paying a peer, Alice needs to submit a transaction to L1 (and the peer will need to submit another transaction to L1 to claim the final amount after the exchange is completed).

Virtually-funded channels are a novel state channel construction that uniquely enables paid file torrenting with a good user experience, as well as interesting use cases like decentralized Graph query payments, Filecoin content retrieval, incentivized state provider networks, etc.

🤔 Bit of background 🤔

In the various blockchain ecosystems, state channels are known as a way for a few participants to:

At, we have previously described the fundamentals of how to construct a channel, and how to fund one channel via another channel with a construction called ledger channels. These constructions have the limitation that channel participants must establish a direct relationship on-chain. In other words, if Alice and Bob have never interacted before and now would like to open a channel, Alice and Bob must sign an (off-chain) agreement and deposit funds into a contract.

Enter virtually-funded channels. Virtual state channels allow the following scenario:

For the paid torrenting scenario, Alice makes one L1 transaction to establish a channel with intermediary Irene. She can then connect with any number of peers, "virtually", as long as they also have a on-chain relationship with Irene. Once connected, she can stream payments in exchange for data.