What is the difference between on-chain and off-chain transactions?

There are two types of transactions on the blockchain:

  1. On-chain transactions: transactions reflected on the public ledger, visible to all participants on the blockchain network
  2. 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