The Raiden Network is the Ethereum version of Bitcoin’s Lightning Network, which enables instant, cheap, scalable and private payments between two parties. It is an off-chain solution for making ERC20 token transactions.
Tokens can be transacted using Raiden Network without requiring a global consensus. It is performed by employing balance proofs, digitally signed and hash-locked transactions that are completely collateralized by on-chain deposits that are set up in advance.
It is known as the payment channel technology that enables limitless, bi-directional transfers between two parties. But, only till the net total of their transactions doesn’t exceed the number of tokens deposited. The transactions are instant and don’t involve the main Blockchain network, except during the time the channel is created and when it is being closed.
A binding agreement is enforced on the two parties by the Ethereum Blockchain known as a Raiden balance proof. It is binding because both the parties digitally sign this agreement, hence making sure that none of the two backs out of any value transfers. It is only possible when at least one of the two participants decide to bring it to the Blockchain network.
Since the funds present in the payment’s channel are not accessible by anyone else other than the two participants, a Raiden balance proof is as secure and binding as an on-chain transaction.
It will be infeasible to establish a new channel every time a payer needs to transfer value to a payee because the opening and closing of the channel is still an on-chain transaction. So, Raiden’s network protocol allows indirect payments through a network of channels that make transactions through the shortest route present in channel network that connects the two participants.
This routing and linking of channel transfers forming a network is called the Raiden Network.
Another benefit of Raiden network is that payment channel transfers don’t have transaction fees, unlike on-chain transactions. However, in big networks, intermediaries may charge a nominal fee for allowing fund transfer through their channel. This leads to an intricate routing and a competitive channel fee market.