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We all know by now that blockchain technology allows the transfer of value in a secure and transparent fashion over its network. It doesn't require trusted third parties like a central authority governing its transactions or intermediaries facilitating the same. The transactions afford anonymity though they can be traced back to their origin. Blockchain transactions can be of two types - on-chain and off-chain.
As the name suggests, on-chain transactions are carried out over a blockchain network from start to finish. These transactions ensure greater security and transparency. This is because these transactions are verified in real-time and stored over an immutable distributed ledger. The immutability of the ledger ensures that transactions, once written, aren’t manipulated or tampered with.
However, on-chain transactions may be costly and include high fees and slower transaction throughput. This is more prevalent in the case of Proof-of-Work (PoW) networks like Bitcoin. PoW is an energy-intensive and time-consuming method to validate transactions. Ethereum is undergoing its Merge upgrade tomorrow, which will mark its transition from the PoW to the more-efficient Proof-of-Stake.
The transaction processing time may depend on the consensus mechanism used by the individual network. For instance, the Bitcoin network may take a few minutes to confirm a transaction.
These transactions receive confirmations outside a blockchain network and, as a result, are cheaper and faster than conventional on-chain transactions. They are confirmed outside the blockchain and later integrated into the network. Parties involved in an off-chain transaction agree that the validation and authentication of the transaction will be carried out by a third party.
Off-chain transactions are useful for any blockchain as they help in solving its scalability woes. An example of this would be the Polygon network, which is a layer-2 scaling solution built over Ethereum. Transactions can be taken off the mainnet, helping it scale and speed up, while validating it off-chain allows faster and cheaper transactions.
Besides speed and economy, off-chain transactions offer anonymity and more privacy to the users as the data is validated outside the main network rather than being publicly broadcasted. However, off-chain transactions offer less transparency as a third party is involved and are less secure because there is no consensus mechanism to validate the transactions. Off-chain transactions happen in a private cloud-like environment.
Both kinds of transactions have their pros and cons and hold their relevance in the transactional scheme of things in the decentralized domain.
Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.