State channels offer another scaling solution, which allows users to transact directly with each other off-chain a certain number of times and only submit two on-chain transactions for validation.
Users pay to open a channel, do their transactions within the channel, and then pay to close the channel back to the main chain. This significantly reduced the cost and increases the speed of transactions while still relying on the security of the main chain.
Instead of completely eliminating on-chain transactions, they are only reduced to the absolutely necessary sequences to increase the efficiency of the main chain.
The state channel reverts back to the main chain as the dispute resolution mechanism, so the off-chain users are incentivized to act truthfully.
State channels can be customized for specific use cases and user requirements while also resulting in high performance with low cost. But they can be inefficient to set up for one-off transactions, can have security vulnerabilities, and can have settlement delays and restrictions on participation.
- Summary: Users can create a side chat to conduct transactions more efficiently and then go back to the main chat once they are done and ready to tell everyone else about the transactions they conducted.
- Example: State channels are similar to the **Bitcoin Lightning Network, but can do more than just process payments. They can also be used to update the state of the main chain after more complex transactions are completed off-chain.
- State channel explanation by Ethereum