Generally, on-chain transactions are accessible on the distributed ledger, thereby becoming observable to all the nodes on the blockchain network. Contrary to the on-chain, Off-chain transactions are transfers of value outside the main network.
Each of these two ways of executing a transaction and storing data has its own advantages. The parties who are involved in recording a transaction usually choose the way that is most suitable to them. Unique features of both kinds will be explained in this article.
They are also called blockchain transactions that are processed on the public ledger. Many participants need to verify the transactions and confirm that they are valid. Because all data of these transactions are published on a public network, it is secure and irreversible.
The time of validating and confirming each transaction is based on the network congestion. As a result, the delay is very frequent for this on-chain type if a large number of transactions are in process of being verified. It is also highly possible to have to pay much more fees to speed up the verification process.
Security: Since information is recorded on the blockchain, it cannot be altered.
Transparency: as to the fact the data is open to the public, transparency is ensured.
“Off-chain” cannot be exactly interpreted as “not on the blockchain”. In fact, off-chain transactions are not processed inside the main blockchain network. It can solve some problems that users usually face in an on-chain kind such as high fees and low speed. Accordingly, it is increasingly growing in popularity.
Low fees: Parties who are willing to make a transaction do not have to pay high fees. Instead, by executing the transaction outside the main blockchain, they can pay much lower or sometimes zero fees.
High speed: Since transactions are performed immediately, the involvement of many participants is not needed.
Privacy: Off-chain transactions offer more security and anonymity to the participants because their data are not publicly broadcasted.
Due to the fact that any changes are not made to the main blockchain and no participants are involved in the process of validation, most of these transactions do not need a fee. If transaction parties want to publish their data related to a high value asset on the distributed ledger, they have to pay a considerable high fee. Therefore, when high value assets are transferred, an off-chain method of recording data attracts great attention.
Off-chain transactions can be carried out by two parties when they reach to an agreement. Sometimes, third party might be involved as a guarantor to make sure that all the process of transfer agreement goes well.
Different methods can be employed to do this kind of transactions. One way is using payment chains that are numerous such as Bitcoin’s Lightning Network executing peer-to-peer transactions.
Swapping private keys to an existing wallet can be another method. The process involves assigning a new owner to a particular wallet. With this method, no changes are made to the blockchain network and transactions are performed instantly.
Some decentralized exchanges adopting the role of escrows act as guarantors between two parties who want to make an off-chain transaction. For example, P2P trading platform on Binance provides users with an opportunity to exchange various cryptocurrencies and choose the most suitable off-chain payment method out of available different ones for their need.
An on-chain transaction is made on the distributed ledger and is visible to all network participants. On the contrary to this kind of transaction, off-chain one is carried out outside the main blockchain and miners are not needed to do the ledger verification. It is typically done among trusted parties or individuals.
Off-chain transactions can be done immediately and have some advantages in comparison with on-chain ones including lower fees, faster settlement, and more anonymity.