Crypto Basics: Understanding On-Chain and Off-Chain
ON Chain Vs Off Chain BitcoinTransactions
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Crypto Basics:Understanding On-Chain and Off-Chain
TransactionsWe all know by now that blockchain technology allows the transfer ofvalue across its network in a secure and transparent fashion. It does notrequire trusted third parties such as a central authority controlling itstransactions or intermediaries facilitating it. Transactions carry the risk ofanonymity, although they can be traced back to their origin.
Blockchaintransactions can be of two types - on-chain and off-chain.
On-ChainTransactions
As the namesuggests, on-chain transactions are carried out on a blockchain network fromstart to finish. These transactions ensure greater security and transparency.This is because these transactions are verified in real time and stored in animmutable distributed ledger.
Theirreversibility of the ledger ensures that transactions, once written, are notmanipulated or tampered with. However, on-chain transactions can be costly andinvolve high fees and slow transaction throughput. This is more prevalent inthe case of proof-of-work (PoW) networks such as bitcoin. PoW is an energy-intensiveand time-consuming method for validating transactions.
Ethereumis undergoing its merge upgrade tomorrow, which will mark its transition from PoW to a more efficientProof-of-Stake. Transaction processing times may depend on the consensusmechanism used by individual networks. For example, the bitcoin network maytake a few minutes to confirm a transaction.
Off-ChainTransactions
Thesetransactions receive confirmation outside a blockchain network and, as aresult, are cheaper and faster than traditional on-chain transactions. They areverified outside the blockchain and later integrated into the network.The parties involved in an off-chain transaction agree that the transactionwill be verified and authenticated by a third party.
Off-chaintransactions are useful for any blockchain as they help solve its scalabilityproblems. An example of this would be the Polygon Network, a layer-2 scalingsolution built on Ethereum. Transactions can be decoupled from themainnet, helping it scale and speed up, allowing for faster and cheapertransactions while validating off-chain.
In additionto speed and economy, off-chain transactions offer users anonymity andgreater privacy as data is validated outside the mainnet rather than beingtransmitted publicly. However, off-chain transactions provide less transparencybecause a third party is involved and are less secure as there is no consensusmechanism to validate transactions. Off-chain transactions happen in a privatecloud-like environment.
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