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There are two types of transactions on the blockchain:
- On-chain transactions: transactions reflected on the public ledger, visible to all participants on the blockchain network
- Off-chain transactions: transfer agreements between two or more parties
It is important to note that off-chain transactions are reserved for trusted parties, and typically occur between two individuals. Even so, off-chain transactions are becoming increasingly popular due to the following advantages over on-chain transactions.
Advantages to off-chain transactions:
- Cheaper — they are usually free as there is no participant required to validate the transaction
- Faster — transactions are recorded immediately without having to wait for network confirmations
- More privacy — transfers are not visible on the public blockchain
Methods of off-chain transactions:
- Payment chains — peer-to-peer transactions using multi signature technology such as Bitcoin’s Lightning Network
- Sidechains — use two-way pegging systems to move coins between the main chain and the sidechain
- Credit-based solutions — record debits and credits between two trusted parties such as Ripple.
- Trusted 3rd parties — record and guarantee the transaction, such as Blockbasis