A state channel is a process by which a second-layer scaling solution is derived to minimize the load of necessary on-chain transactions.
Understanding the term
A state channel in terms of blockchain is a simple process that allows users to transact with one another directly off-chain (i.e., outside the blockchain). The concept of a state channel became necessary when crypto enthusiasts and developers became concerned about scaling solutions. A second layer or layer-2 scaling solution is necessary to ensure that on-chain transactions continue normally while allowing off-chain transactions between the users. This is one of the most advanced developments planned for the Ethereum blockchain to make it production-ready.
By moving blockchain participants off-chain (where they are free to transact without putting extra load on-chain), state channels will result in a faster and congestion-free blockchain. Participants can sign on to the main chain after they are done with multiple off-chain transactions. Basically, when participants use a state channel, they can execute multiple off-chain transactions while only submitting two on-chain transactions to the Ethereum network.
A state channel is a kind of smart contract meant to uphold established rules for off-chain transactions. State channels and sidechains are generally used interchangeably when we refer to layer-2 scaling solutions.