There’s no disputing that blockchain is a revolutionary technology. The transparency and efficiency offered by blockchains are some of the reasons for their meteoric rise to the fore. Off late, organisations have started storing blockchain-native data as On-chain or Off-chain storage systems.
On-chain vs Off-chain transactions are not the easiest to understand, so let’s look at an analogy to figure it out. Imagine a blockchain to be a cloud storage facility. This cloud storage service is divided into two sections: private and public. Data stored in the public cloud is publicly accessible, these are On-chain transactions. The data stored on the private cloud is however only accessible to a select few. These are Off-chain transactions. However, both are part of the same main cloud storage facility.
So how do these two mechanisms work? What’s the difference between On-chain and Off-chain transactions? And is one better than the other?
What is an On-Chain Transaction?
These are transactions that take place on the blockchain. They are stored on the decentralised ledger and can be viewed by anyone who has a copy of the same. The blockchain network is updated every time an On-chain transaction occurs.
When transaction volume is low, On-chain transactions can be quick. New network protocols and crypto assets have been designed to improve transaction speed and are becoming very common.
What’s Wrong With On-chain Transactions?
In an ideal world, On-chain transactions should successfully take place in real-time. However, that’s not the case. Transactions that happen on-chain need to be validated and verified by various network participants. Post this, miners must take certain actions such as adding the transaction to the blockchain depending on their consensus mechanism. This significantly increases transaction times.
Networks such as Bitcoin are also increasing in popularity. And as more transactions are requested on the network, it gets further congested. And as you can imagine, a congested network is a slow and costly network. This is where Off-Chain transactions come in.
What Is an Off-Chain Transaction?
Off-chain transactions take place outside the blockchain. A third party acts as a guarantee in an Off-Chain transaction. The participants of the transaction deal with each other outside of the blockchain. They do, however, rely on a third party to assist in the transaction. When all of the criteria are satisfied, the transaction is performed and recorded on the blockchain.
Layer 2 solutions play a key role in off-chain transactions. Some widely adopted off-chain solutions are the Lightning Network and the Liquid Network.
A fast and cheap solution is the Lightning Network. The Lightning Network is built on the Bitcoin blockchain. This solution essentially opens a channel between two participants. These participants can now conduct Bitcoin transactions cheaply. This transaction data is not uploaded to the blockchain. Once the channel is closed, only then is the transaction recorded on the Bitcoin blockchain.
Read more: What is a lightning Network?
Difference Between On-Chain and Off-Chain Transactions
On-chain transactions are irreversible and processed on the blockchain network. On-chain transactions take significantly longer than off-chain transactions. Since the transaction is confirmed by participants and published on the blockchain network it is highly secure.
Off-chain transactions take place without affecting the main blockchain. This removes the need to validate transactions. This also lowers transaction fees and speeds up the process. The transactions can be executed instantly. There is no lag time like on-chain transactions. The costs associated with off-chain transactions are minimal as they don’t take place on the blockchain.
Read more: What is Blockchain Layer?
Unlike On-chain, Off-chain transactions are not recorded on the blockchain. If the participants no longer want to participate, they can do so without leaving a permanent record of the same. This offers anonymity to those involved in the transactions.
The final decision in the On-chain vs Off-chain debate depends on your use case. Off-chain transactions are ideal for those looking for quick, anonymous, and cheap mechanisms. On-chain transactions provide you with security and immutability. Recall the cloud analogy. Do you want your data on a public but secure cloud or a faster and private cloud?