How on-chain and off-chain transactions work
When creating the world’s first cryptocurrency, the developers worked on finding a solution to the idea of free circulation of funds without the participation and control of these processes by third parties.
And they did it, the final product is called Bitcoin, which allows you to make money transfers to each other without intermediaries.
The principle of on-chain transactions
The essence of the application of blockchain technology in cryptocurrencies is to record all movements (transfers, transactions) in the network, which cannot be changed. Each, even small-scale transaction will be recorded in the “log” of the blockchain. This principle is called an on-chain transaction.
But, the use of this principle ran into a problem of network bandwidth, because due to the large number of transactions, miners did not have time to confirm transactions committed by users.
This has led developers from around the world to think about resolving the issue of low network bandwidth. One such solution was the introduction of off-chain transactions.
The principle of off-chain transactions
The essence of use is to make the blockchain more scalable and anonymous, and transactions within the network are as fast as possible. As for the technical point of view, all transactions (transactions) are carried out within the cryptocurrency network, but outside the main blockchain.
This approach provides for recording only the initial and final result of the transaction on the blockchain, all other steps to confirm the transaction occur outside the blockchain. The main issue in implementing this principle is the choice of a method for confirming these transactions. At the moment, there are several solutions that allow transactions outside the blockchain, and one of them is Lightning Network technology.
Where on-chain and off-chain are used
Each cryptocurrency that uses the classic blockchain as a basis makes on-chain transactions. Among these cryptocurrencies are Bitcoin and Ethereum, but soon they can switch to using a different principle, because in both cryptocurrencies the question of network scalability remains open.
The principle of using off-chain transactions has become increasingly common in new projects, their main goal is to provide functionality similar to the 1st and 2nd cryptocurrencies, but with a solution to the issue of bandwidth.
As described above, the most popular solution for using off-chain transactions is the use of Lightning Network technology. At the moment, it is fully implemented in the Litecoin cryptocurrency.
But, there is another solution that allows you to solve the problems described above – this is the use of the so-called sidechain (side chains). This solution is used in the Lisk cryptocurrency.
We hope that after reading this article, you can understand the difference between on-chain and off-chain transactions, as well as what advantages cryptocurrencies provide to non-blockchain transactions.