What is a state channel?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A state channel locks funds on-chain, lets the participants exchange signed updates off-chain, and settles only the final result. The intermediate updates cost no fee and wait for no block. Bitcoin's Lightning Network is the best-known example.
Key points
- Participants exchange signed state updates off-chain
- Only opening and closing touch the chain
- Intermediate updates are instant and free of on-chain fees
- Cheating is countered by disputing within a time window
Definition
A construction in which parties lock funds in a contract, then repeatedly update how those funds are split using only signatures between themselves, publishing just the final state on-chain.
Think of an escrowed running tally. Two parties first publish a transaction locking funds. After that they simply sign and swap statements such as 'the split is now 0.6 to A, 0.4 to B' — hundreds of updates, no fees. At the end, the latest state is submitted on-chain to settle.
Cheating is deterred with a delay. If one side publishes an old, more favourable state, the other has a window to present a newer signed state and override it. On Lightning, that dispute is designed to cost the cheating party the funds they tried to claim.
Lightning also routes payments through other people's channels to counterparties you have no direct channel with. That requires enough liquidity along the path in the right direction, and routes sometimes cannot be found. It suits repeated dealings with known counterparties far better than one-off payments to strangers.
Watch out for
- · Being offline during the dispute window can let a counterparty settle on an outdated state
- · Funds locked in a channel are unavailable for anything else until it closes
- · Payments fail when routing liquidity is short — holding a balance does not guarantee you can send