On-chain vs. Off-Chain Transactions: What’s the difference 2023?

1. On-chain vs. Off-chain Transactions: What’s the difference?

In the world of cryptocurrencies and blockchains, there are two main types of transactions that take place – on-chain transactions and off-chain transactions. Both serve important purposes in the overall ecosystem. But what exactly is the difference between on-chain and off-chain transactions?

2. On-Chain Transactions

On-chain transactions refer to transactions that occur directly on the blockchain network. For example, if you send Bitcoin directly to someone else, that is an on-chain transaction.

Some key things to know about on-chain transactions:

They Are Recorded on the Blockchain

On-chain transactions are directly written to the public ledger that underlies cryptocurrency networks. This means there is a permanent, transparent record of the transaction for all to see On-chain vs. Off-Chain.

They Require Mining Fees

Because on-chain transactions are processed and validated by miners, you need to pay a small mining fee to incentivize miners to process your transaction. These fees vary based on network congestion.

They Have Slower Settlement Times On-chain vs. Off-Chain

Since on-chain transactions must go through the consensus process to be validated and added to a block, there is not immediate settlement finality. It often takes 10+ minutes for a transaction to On-chain vs. Off-Chain process on blockchains like Bitcoin and Ethereum.

3. Off-Chain Transactions

Off-chain transactions, on the other hand, happen outside the blockchain network. They allow for faster and cheaper transactions.

Some defining features of off-chain transactions On-chain vs. Off-Chain:

No Direct Interaction with the Blockchain

Unlike on-chain transactions, off-chain transactions do not directly interact with the underlying blockchain. Changes are not written to the chain.

Lower Fees and Faster Settlements

By avoiding the blockchain consensus process, off-chain transactions have much quicker settlement times and dramatically lower fees.

Less Decentralization and Transparency

The downside is that off-chain transactions sacrifice a bit of decentralization and transparency for their speed and cost benefits. There is no public record On-chain vs. Off-Chain.

Investopedia’s definition

• “On-chain transactions refer to transactions that are recorded and verified on the blockchain.”
• “Off-chain transactions don’t occur on the blockchain network, but instead, are transacted on another electronic system such as PayPal.”

Source: https://www.investopedia.com/terms/c/chain-transactions-cryptocurrency.asp

CoinDesk’s definition

• “On-chain transactions refer to a transaction that is carried out on a blockchain network from start to finish. Once verified, the transaction is recorded on a blockchain network’s public ledger.”
• “Off-chain transactions transfer some of the work from a blockchain ecosystem, which can later be integrated back into a blockchain. On an off-chain network, the users agree that a third party will handle validating and authenticating transactions.”

Source: https://www.coindesk.com/learn/on-chain-vs-off-chain-transactions-whats-the-difference/

CoinMarketCap’s definition

• “On-chain transactions are transactions that occur on a blockchain, which are reflected on the distribution as well as the public ledger. The on-chain transactions are those that have already been validated as well as authenticated by the miners or authenticators.”
• “Off-chain transaction agreements happen actually outside of the blockchain, and this protocol employed with off-chain transactions is similar to that which is used on payment platforms, one of the most popular ones being PayPal.”

Source: https://coinmarketcap.com/alexandria/glossary/on-chain

CoinBase’s definition

• “An on-chain cryptocurrency transaction On-chain vs. Off-Chain is completed by transmitting it over a blockchain to process, validate, memorialize, and store it. For example: Sending cryptocurrency from a Coinbase Vault wallet. This is a publicly available transaction.”
• “An off-chain cryptocurrency transaction is completed using a system other than a blockchain. For example: Using a third-party guarantor to oversee a transaction and ensure that it’s completed successfully.”

Source: https://help.coinbase.com/en/prime/trading-and-funding/on-and-off-chain-transactions-on-coinbase-prime

ByBit’s definition

• “Bitcoin on-chain transactions are validated by miners and recorded on the blockchain. Once the transactions are added to the ledger, the blockchain network is updated and distributed.”
• “Off-chain transactions are any transactions processed outside the blockchain. These second-layer protocols aim to circumvent the on-chain’s flaws by enabling a cheaper and faster transaction.”

Source: https://learn.bybit.com/blockchain/off-chain-vs-on-chain-transactions/

My definition

• On-chain transactions are payments or monies being sent on a blockchain, which are verified and recorded on that chain.
• Off-chain transactions are payments or monies being sent through traditional means, such as a wire, ACH, Venmo, PayPal, etc. that don’t require the need of a blockchain.On-chain vs. Off-Chain

Source: OnChainAccounting.com

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