State channels
Written by Max Hinchman
Introduction
State channels are two way transaction channels for users or machines. State channels give the option of taking transactions between two users off of the blockchain in order to improve scalability and to provide transactional privacy. Because the transactions are taking place off the main blockchain and is exclusively between two users, it results in cheap and fast execution.
The state channels consist of locking a part of the blockchain state through multisignature or a smart contract. Users then submit and sign transactions by themselves, each new update permanently superseding the old state. The users can transfer the state back to the blockchain, which then closes the state channel. In order for state channels they must follow the statement, “could be submitted to the blockchain.” Users must remain in position that they could publish the current state of the channel at any given time.
State channels are loosely defined and based solely on the needs of the two users, so the implementation is left completely to the developer. For example, the state channels can be closed at any time, whether it is after a few hours or when the total number of transactions.
The most widely known state channel project at this point is the Lightning Network. It applies smart contract functions to the blockchain in order to facilitate instant payments. When used on the bitcoin blockchain, it solves the issue of slow and expensive transactions. The security of the lightning network is enforced by smart contracts and eliminates the need for on-chain transactions for individual payments.
Suggested Reading
What are State Channels? by Stephan Tual
State Channels for Dummies by Eric Olszewski