This document provides an introduction to state channels and payment channels. It discusses how payment channels use off-chain transactions and transaction replacement to enable numerous transactions without using the blockchain. It describes different types of payment channels including mono-directional, time-based bidirectional, and punishment-based channels as used in the Lightning Network. State channels extend payment channels by enabling smart contracts to govern transactions and keep channels open indefinitely through transaction replacement using secrets instead of time-locks. Potential applications include micropayments, streaming payments tied to resource consumption, and enabling peer-to-peer banking services with net settlement of obligations.