CryptoURANUS Economics: State Channel: Defined in CryptoCurrency


Thursday, May 6, 2021

State Channel: Defined in CryptoCurrency

State Channel: Defined in CryptoCurrency

A state channel is defined as a more affordable, private, and efficient place for interactions to occur and later be recorded onto the blockchain.

Traditional cryptocurrency transactions are recorded onto the blockchain, a digital record book kept by its network of thousands of users. The blockchain allows users to do business directly with each other and avoid hiring a trusted third party.

Because the blockchain is maintained by a network, each new recording in the blockchain needs to first be recorded and then shared and verified to the entire network. With tens of thousands of transactions happening every day, it can take 10-30 minutes for a single bitcoin transaction to be recorded and shared onto the blockchain.

A “state” is defined as the condition or situation of something at a specific time. A “channel” is a place for communication to occur. So a state channel is a safe place where authorized interactions can occur, be recorded, and later published onto the blockchain.

A state channel lets users interact directly, removing the need for all data to be sent to the blockchain. Out of potentially hundreds or thousands of messages, only the final results are sent to the blockchain.

For example, imagine James and Jessica are a couple who want to buy stuff from the local bitcoin mall:
  1. With the blockchain, for every purchase they make, they must wait 10+ minutes after buying so the store can see that the blockchain recorded the sale. That means, if they shopped at 6 stores, they’d waste 10 minutes at each, or a full hour waiting for the blockchain to catch up.
  2. With state channels, James and Jessica can shop at each store as they normally do. There would be no waiting at each store because every transaction is instant. As they leave the mall, they can close their state channel. 10 minutes later, the blockchain would display the results of their shopping trip.
Features of state channels include:
  • The data is private. Only people initially invited into the state channel have access.
  • The interactions are instant. No waiting for the blockchain to catch up.
  • The interactions are nearly free. Instead of paying each time to have your data recorded onto the blockchain, only the results are recorded.
  • The data is trustworthy. Each message is digitally signed by the user to prove they authorized it. If any user tries to cheat or leaves early, the other user(s) can publish the state channel finalizing the latest authorized results.
  • The data is smaller. Only the final results are recorded, not every single message reducing data added to and shared on the blockchain.
  • State channels end. Unlike the blockchain, an end time or end conditions (such as number of transactions) are set at the beginning. Users can end their state channel early.

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