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The split between on-chain and off-chain transactions are generally characterized as:
- 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 that are not recorded on the blockchain, typically recorded in centralised databases like banks or other financial intermediaries
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