What Is State Channel?
Also known as: State Channels, Payment Channel, Off-Chain Channel
In short
A state channel is a scaling method in which two or more parties lock funds in a smart contract, carry out many transactions off-chain using signed messages and write only the opening and closing to the blockchain.
When the channel is opened, the parties lock a certain amount of assets in a shared contract or multisignature address. After that, every payment or state change between them is updated with a new 'state' message signed by both parties. Because these messages are not sent on-chain, they are instant and nearly free. When one of the parties wants to close the channel, the last signed state is submitted on-chain and the funds are distributed accordingly.
The best-known example is the Lightning Network on Bitcoin; here, payment channels are linked together so that payments can also be made between people who do not have a direct channel. For example, hundreds of small payments can be made in a channel between a user and a cafe, and only the opening and closing transactions appear on-chain. On Ethereum, general-purpose state channels have also been developed for games and micropayments.
State channels have clear limits. Participants must keep their funds locked while the channel is open and must monitor the network against the counterparty submitting an old state on-chain; monitoring services called 'watchtowers' can be used for this task. In addition, because participants are known in advance, they are not suitable for public, multi-party applications; rollups have become more widespread in this area.
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