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What are Channel Factories? In short, Channel Factories are payment channels that can be used to create more payment channels. That sounds weird, but it's really pretty simple: In a regular payment channel, you always have a transaction signed by all participating parties that's ready to commit the current channel balances to the block chain. For example,...

Pretty much everything would stay the same. If you look at the relevant messages channel_announcement and channel_update we have the following formats: channel_announcement type: 256 (channel_announcement) data: [64:node_signature_1] [64:node_signature_2] [64:bitcoin_signature_1] [64:bitcoin_signature_2] [2:len] [len:features] [...

You are correct. It is not possible to get Diana into the Channel Factory without a transaction that closes and reopens with Diana. Splicing-in and splicing-out as explained by Decker et al. in the paper you mention is not secure. Imagine the following situation: Alice, Bob and Carol spliced out Dave by creating a new Allocation within the same factory, ...

It's possible for Alice and Bob to agree among themselves to pay Carol and any number of other recipients (subject to limits on transaction size). However, it's not possible for Carol and other additional recipients to receive those payments with the same trustless security available to Alice and Bob through the payment channel construct. Alice and Bob ...

The main problem I see with this is increased complexity, and possible collusion between 2 of the 3 parties. If Carol is now required to sign updates, what does Alice do if Carol is unresponsive? Broadcast her rescue transaction even though Bob is a responsive participant? Does she have rescue transactions for misbehavior from both Bob and Carol? What if ...