Currently, the transaction which founds the channel contains only one output - a multi-signature address which is in control of both parties. The idea is to use only a part of the founding transaction as a punishment. The first transaction would contain two outputs - one with the funds used on the Lightning Network and the second one released only if the other person attempts to cheat. Shachain or elkrem preimage make sure that the reserve isn't spent improperly. You can think of the reserve as a security deposit.
Thanks! However, if I understand it the right way, I have a problem with this approach: it would be needed to lock lots of funds in penalty outputs if LN sees mass adoption, as the "penalty output" should be big enough to prevent incentives to try it anyway, above all for "malevolent big hubs" which could tolerate a certain percentage of "failure" of the scam intents.
That could even be a problem for mass adoption: many "average Joes" could refuse to deposit more funds than those they're able to really spend in LN. The funds could be spent later, that's true - but that would need, afaik, a on-chain refunding.
I understood the discussion that this isn't the only concept they're thinking about, so maybe there is a better way to be found. Maybe LN-penalty can stay there as an alternative option.
Just out of curiosity: Someone knows why this mechanism called "eltoo"?