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.