Crypto glossary
State channel
A state channel lets a fixed group of participants exchange signed updates off-chain and settle only the final result on the blockchain.
A state channel starts with an on-chain transaction that locks funds or state in a contract or multisig. From then on, participants trade signed messages that update the shared state, such as balances or the position in a game, without touching the chain. When they are done, or if one side stops cooperating, the latest signed state is submitted on-chain and the contract settles it.
Payment channels, like those in the Lightning Network, are the simplest and most widely used form. Generalised state channels were explored on Ethereum for micropayments, games and exchanges, because interactions inside a channel are instant and nearly free. They were one of the first layer 2 ideas, before plasma and rollups.
Channels only suit a known set of participants who stay online or hire watchtowers to react if a counterparty submits an old state. Capital is locked for the channel's life, and opening and closing cost on-chain fees. These limits explain why rollups, which serve anyone without prior setup, became the dominant Ethereum scaling approach.
Example
Two players lock tokens in a channel contract, play hundreds of chess moves by exchanging signed messages, and publish only the final position so the winner can claim the stake.