Level2 Smart Channel technology in simple words

What is the Smart Channel?

In order to reach high transaction rate and store funds in decentralized manner, Level 2 offers the solution of payment channels aka smart channels. How does the payment channel guarantee the security of funds and why traders can trust this technology? Let’s explain the technical base behind Level2 exchange in simple words.

A smart channel is an area where the exchange platform and the trader can exchange funds outside of the blockchain and from where the funds can’t be withdrawn unilaterally. Channel time, as well as all other conditions, is strictly fixed by a smart contract. Each transaction, purchase or sale, is assigned with a unique identifier, the number of which is always one more than the previous one. The transactions of the exchange and the trader are never separated inside the channel, and each new record contains the history of all the previous ones. In this regard, the numeric identifier in a simplified form repeats the general principle of the blockchain.

Smart channels never limit the number of transactions they able to conduct. Only the time of their operation time is limited. And when it ends, a mutual calculation takes place based on the last digital identifier. In this system, each last transaction is the result of all the previous ones and serves as a payment order of the exchange to the trader or vice versa, depending on the outcome of the trades.

So, how does it works?

Technically, the smart channel is an API that works independently of the exchange and is stored inside the browser. A trader can also organize his own trading terminal using special platform software, which is distributed free of charge. The API contains not only the entire history of transactions signed within the payment channel, but also an interface for closing the channel. When the trader decides to finish the traded and withdraw his money, he sends a closing order to the channel. The smart contract analyzes the history of an operations and make payments both for trader and the exchange inside the blockchain simultaneously.

What fraud protection mechanisms are provided in smart channels?

Firstly, each transaction is signed by the opposite party and it is impossible to sign your own transaction yourself. This means that if one of the parties decides to terminate the smart contract, it will be able to use only the last transaction, which was signed by the other party by this time. Therefore, a trader who has lost funds will not be able to use an earlier transaction identifier, where his balance was still positive. Such manipulations are easily determined by a smart contract, and the party who chose to cheat is being penalized.

But what if the platform is attacked and unexpectedly went offline? In this case the trader still keeps the API and the entire history of operations performed within the channel. All the trader needs to do is just wait until the channel time expire, after that he will be funded basing on the last signed transaction.

This way Level2 solution guarantees the safety of traders’ funds in any scenario. Unlike clumsy decentralized exchanges, it also provides simplicity and a high rate of operations.

Together these qualities make Level2 an ideal option for a daily trading, especially for those who make a lot of orders or use trading bots.