- How do two parties start a payment channel?
Both parties have to open multi-signature transaction. At least 1 of the 2 parties has to commit funds to this transaction.
- How are you punished if you try to do an invalid transaction?
The remaining party can use a Breach Transaction remedy contract - publish “penalty” transaction. In that case, the person that fraudulently wanted to use other than the most recent commitment contract is blocked for the time of 100 blocks - as a result, the party in defense can claim all of the funds the fraudulent party has.
- What is the purpose of “watchtowers”?
Watchtowers are supposed to automate supervision of the transactional activities - making sure that no one is trying to benefit from publishing other than the most recent commitment contract. If someone does try to benefit, the watchtower can enforce Breach Remedy contract and share the profits with the party that has been defended - by getting a percentage from the sum of money the fraudulent party had.