Understanding the Concept of State Channels

What are state channels?

State channels are referred to as the procedure through which the users conduct a transaction with each other off-the-chain or outside the blockchain. Both participants use their private keys in the channel for the transaction, ensuring security in the process. It is quite similar to that of Bitcoin Lightning Network’s payment channel concept. However, there is a little difference, as instead of supporting payments; they support general state updates.

How do state channels operate?

The working of a state channel is quite interesting. The Ethereum platform process goes like this:

  1. Every participant in the state channel sign the transactions and then send them to each other. Each of them creates and keeps a copy of the signature for future reference.
  2. Each transaction takes place so that a chronological order of all the transactions is maintained for the smart contract.
  3. After the participants have conducted the transaction via the state channels, they close it by submitting the last update.
  4. Followed by updating and unlocking the state, the remaining balance is sent to the participants by the smart contract.

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