Hey kiddo,

So you know how bitcoin is assigned to addresses and how bitcoin assigned to an address can only be spent by the person who created the address?

Well an address can be owned by 2 people too. When owned by 2 people, it means that neither person can spend any bitcoin unless there is unanimous agreement. 2 people own it if they agree with one another, but neither of them own it independently.

A lightning channel is bitcoin stored in one of these shared addresses as well as some private channel state that each participant manages their own copy of.

The channel state dictates how much of the bitcoin in the shared address belongs to who, as well as keeping some pre-signed transactions that will allow either party to withdraw their share of the pot at any time, even if the other person goes dark and becomes unresponsive.

When one person wants to give some of their bitcoin to the other person, the channel state gets updated reflect that and new transactions are created and signed to ensure that there is an exit strategy at all times for both parties.

Needless to say, an update requires both parties to work together since both parties need to update their respective channel states and also need to be involved when signing these exit strategy transactions.

The benefit of channels is that the balance can be updated as many times as you'd like for free, without waiting for it to be mined into a block, and without losing a fraction of the balance for fees. Only when one of you need to withdraw your bitcoin to use for something else, will a transaction be broadcast to be mined into the blockchain which requires waiting for block confirmation and allocating a fraction of the balance for miner fees.

Now that's the benefit of a single channel, but when I have a channel with you and you have another channel with a friend of mine, then we have a network where I can send money to you to give to my friend and the Lightning Network protocol has a way to facilitate that in a way where you can't cheat me by being the middleman. You can, however ask for a small fee to facilitate the payment and if it's cheaper than me making a normal transaction, it's in my interest to make the payment that way.

This just so happens to make channels even more useful. I can now pay others by paying through you using our channel and you could do the same paying through me.

So TLDR; a channel is bitcoin stored in a shared address between 2 people, some channel state that each person uses to keep track of who owns what portion of the funds and a series of signed transactions that ensure there is always an exit strategy in case one of the people go rogue.

This is why we say Lightning bitcoin IS bitcoin. Units of bitcoin on the Lightning Network are backed by actual Bitcoin transactions and neither party can forge a transaction without the other agreeing to it which is why the transaction doesn't need to be mined into a block to know that the allocation of bitcoin in a channel is safe from fraud.