What is State Channels

Second layer solutions are enhancements that operate on top of a primary blockchain, interacting with it only to ensure data security and availability. They utilize the underlying blockchain’s consensus mechanism for security without altering its core protocol, functioning as an extension. These solutions fall into several categories, including state channels like the Lightning Network, sidechains such as the Liquid Network, Plasma, rollups, and validiums like zkPorter.

State Channels are designed to address the scalability issues of blockchain systems. They do so by allowing transactions to occur off-chain, thus reducing the burden on the network. Users initiate a state channel by conducting a blockchain transaction to open it. While the channel remains open, participants can conduct unlimited transactions off-chain. To finalize the channel, users perform another blockchain transaction. This system enables numerous state transitions off-chain, with only two transactions being recorded on the blockchain.

Payment channels are a specific type of state channel focused solely on payment transactions, allowing for changes in account balances or UTXOs linked to an address.
These channels offer a secondary network for transactions between parties, resulting in minimal fees and quick payment finalization. This is because not every transaction has to be processed through the primary layer. The user experience is akin to traditional payment systems, with no lengthy waits for transaction confirmation.

However, state channels require users to remain online continuously to process transactions and monitor for any potential misconduct, such as unilateral attempts to close a channel. This implies that all participants are constantly active on the network.