Start planning with our FREE 2024 Crypto Tax Playbook
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?
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.
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.
Source: https://www.investopedia.com/terms/c/chain-transactions-cryptocurrency.asp
CoinDesk’s definition
Source: https://www.coindesk.com/learn/on-chain-vs-off-chain-transactions-whats-the-difference/
CoinMarketCap’s definition
Source: https://coinmarketcap.com/alexandria/glossary/on-chain
CoinBase’s definition
ByBit’s definition
Source: https://learn.bybit.com/blockchain/off-chain-vs-on-chain-transactions/
My definition
Source: OnChainAccounting.com
If you enjoy my content, please give me a follow on Medium or checkout my below profiles!
Onchain Accounting stands as your vigilant financial co-pilot, ensuring compliance and peace of mind.
© 2024 Onchain. All rights reserved.
Disclaimer: The logos on this website are copyrighted and registered trademarks of their respective owners. They are used for demonstration purposes only and do not imply endorsement.