State channels

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State channels are a Layer 2 scaling technology used to improve the transaction capacity and efficiency of blockchain networks. They allow multiple transactions to occur between two or more participants “off-chain,” meaning outside the main blockchain, without requiring each individual transaction to be immediately broadcast and validated by the entire network. Participants open a channel by locking some funds in a smart contract on the main chain. Once the channel is open, they can transact freely and instantly amongst themselves, updating the channel’s “state” with each interaction.

Only the initial opening and final closing transactions of the state channel are recorded on the main blockchain. This significantly reduces transaction fees and latency, as the bulk of the activity happens off-chain. State channels are particularly useful for applications requiring high transaction throughput, such as micropayments, gaming, or frequent data exchanges between specific parties. They provide a secure environment because the underlying blockchain still guarantees the final settlement based on the latest mutually agreed-upon state if any disputes arise. Examples include Bitcoin’s Lightning Network and Ethereum’s Raiden Network, which utilize state channel concepts.

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