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State channel

A private two-party ledger that settles on-chain only when opened and closed, allowing unlimited instant updates in between.

Two parties lock funds in a contract, then exchange signed balance updates directly. Only the opening and final settlement touch the chain, so the transactions in between are instant and effectively free.

Payment channel networks extend this by routing payments across connected channels, which is how fast, cheap Bitcoin payments work in practice.

The limitations are structural: capital is locked in each channel, you can only transact with parties you can route to, and you must either watch the chain or pay someone to watch, so a counterparty cannot settle an old balance in their favour.

Related: layer-2, finality, blockspace, block-time

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Educational only, not advice. Spotted an error? Post in Site Feedback.