Off-Chain Transaction

Jan 20, 2023 | Updated Jan 20, 2023
Off-chain transactions is a transfer of value or data, including transactions, that occurs outside a given blockchain network.

Off-chain Transaction Meaning

An off-chain transaction refers to an exchange that does not take place on a blockchain network. Transactions are executed instantly, speeding up the transaction process and reducing lag time compared to on-chain transactions, which are recorded on the blockchain and need network confirmation before they are completed. 

These transactions are later integrated into the main blockchain network. An off-chain transaction can be confirmed via an agreement between the two parties. Participants can also agree to use a third party (a layer-2 solution like a Lightning Network) as a guarantor to confirm the legitimacy of the transaction.

One of the main advantages of off-chain transactions is that it improves network scalability, and can increase transaction speed while reducing the network load. 

Comparing On-Chain Vs Off-Chain Transactions

Unlike off-chain transactions, on-chain transactions are carried out on the main blockchain network and are recorded on the public ledger of the blockchain network. Since all on-chain transactions must be validated by network participants through a consensus mechanism, it may slow down network speed. Large volumes of transactions may increase the network load and consume a large amount of computational energy. 

That said, on-chain transactions do benefit from higher in-network security. Since there is no need for any miners to validate in off-chain transactions, there are no transaction fees. 

Benefits of Off-Chain Transactions

Off-chain transactions have various benefits:

  • Off-chain transactions do not occur on the blockchain network and do not need to be validated; hence they usually do not require any transaction fee.
  • These transactions are executed instantly, and have less lag time.
  • Off-chain transactions offer more anonymity to users as the transactions are executed outside the network.
  • Employs layer-2 solutions over the main network that improves transaction speed and efficiency.

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