Fraud

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In the case where either party attempts to defraud the other, a third transaction, which punishes the attacker, will end up being broadcasted on-chain.

When Alice broadcasts a closing transaction to the blockchain, she is attesting to the current state of the chain. But since there may be millions of closing transactions in a channel, all of which are valid, the blockchain itself can’t tell if what Alice attested to was indeed the correct state. Therefore, Alice must wait 3 days after broadcasting the closing transaction before she can redeem her funds. During this time, Bob is given a chance to reveal a secret that will allow him to sweep Alice’s funds immediately. Alice can thus revoke her claim to the money in some state by giving Bob the secret to the closing transaction. This allows Bob to take all of Alice’s money, but only if Alice attest to this old state by broadcasting the corresponding closing transaction to the blockchain.