On-Chain and Off-Chain Transactions

Due to the decentralized nature of cryptocurrency trade, people are looking for more reliable alternatives to maintain privacy while trading online. Usually, transactions made on the blockchain require the validation of data before accomplishment. This data is then stored on the ledger that is transparent and accessible by all. Therefore, two separate ways of transactions began to gain popularity known as “on-chain” and “off-chain” transactions.

On-Chain Transactions

On-chain transactions are the transactions that happen on the blockchain. To validate any transaction occurring on the blockchain requires many participants who are called miners. These participants vote on-chain for updating the blockchain by agreeing upon the common consensus. The weight of each vote depends upon the number of coins or tokens held by the stakeholder. During such transactions protocols become almost irreversible.

Off-Chain Transactions

Off-chain transactions occur outside the blockchain. Here the participants agree upon a consensus to allow the third party to validate the transaction. If the transaction is between two parties, it can be accomplished by switching the private keys also. Since the transaction occurs outside the blockchain, changes on the blockchain are not required. In case the consensus does not reach, the network can generate a fork, or split into two chains running different versions of the software, and the chain with the most transactional hashing power is considered to be the successor to the original chain.

Difference between On-chain and Off-Chain transactions

• On-chain transactions require making a change in the blockchain itself, while in the off-chain transaction changes on the original blockchain are not required as transactions happen outside the blockchain.
• On-chain transactions are time-consuming as validation by many stakeholders is required, whereas off-chain transactions are relatively faster.
• On-chain transactions require additional transaction fees, while off-chain transactions do not require any such fees.
• On-chain transactions are immutable and hence more secure than off-chain transactions.
• On-chain transactions are more reliable than off-chain transactions as it does not require third-party interference.
• Off-chain transactions can be forked by adding a sidechain of 2-layer protocol whereas in the case of on-chain transactions required updates are made on the blockchain.

Final Thoughts

So, now we have a basic idea of on-chain and off-chain transactions. We have also learned how both of them differ from each other. Both of them have a few advantages as well as disadvantages. Depending upon the nature of trade and exchange, either of the two transactions is preferable. Hence, it’s up to the user requirement to choose the kind of transaction technology.