What are state channels in blockchain?
Blockchain is a novel technology designed to improve integrity in transactions and record-keeping. It helps build trust and provides verifiable accountability, a core service in modern digital transactions.
The blockchain allows us to store verified and tamperproof data that can be accessed anywhere in the world. It can be considered an immutable database for authenticating transactions, providing ownership, and much more.
Second-layer blockchain solutions
Second-layer blockchain solutions were created to speed up blockchain transactions. They are built on top of the pre-existing blockchain system. Second-layer systems compute transactions in sets outside the main blockchain (off-chain).
This minimizes the load on the main chain and allows the system to free up resources and computational power for other functions. This act of isolation can facilitate the system to increase the number of transactions the blockchain can handle daily. This system can play a fundamental part in scaling up the blockchain ecosystem.
There are types of second-layer solutions:
State channels
Side channels
Let's look at what channels are below.
What are channels?
Channels are peer-to-peer protocols that allow two parties to make an unlimited number of transactions amongst themselves and then only post the final results to the blockchain. Afterward, cryptography is used to demonstrate how the summarized data results from the earlier set of transactions. A multisig smart contract ensures the correct parties sign the transactions.
Channels enable the execution and validation of state changes by interested parties, which minimizes computation on the blockchain execution layer. Through this, congestion decreases, and transaction processing speeds increase. Let's get into state channels now.
What are state channels?
A state channel is a blockchain second-layer solution. It allows a group of participants to perform unlimited private transactions off-chain. The channel participants can only observe these transactions and are not public. And only the initial and final state of the transactions is recorded in the main blockchain.
Recording multiple small transfers is cumbersome and can slow down the entire system; that is where state channels come in. They make transactions secure, fast, and low-cost, and therefore, the state channel solutions hold the potential for high scalability in the coming future.
Components of a state channel
Let's look at the components of a state channel.
We have three major components: State Updation, Digital Signature, and State Submission.
Construction and signing of transactions are done so that participants can update the state amongst themselves. These are only held onto for some time and later submitted to the blockchain. Each new update overwrites previous updates.
A digital signature is used to lock parts of the blockchain state so that it can only be updated when a specific set of participants agree with each other.
In the end, participants must submit the state's submission back to the blockchain. This closes the state channel and later unlocks the state again.
