Understanding Blockchain: How Do Off-Chain Transactions Work

What are off-chain transactions and why do they matter?

As digital currencies have exploded, so too has the number of people interested in investing in cryptocurrency.

Already, at least 14% of Americans — about 21 million people — have some form of cryptocurrency.

Today, there are two main ways people can carry out crypto transactions — off-chain and on-chain. These transaction modes each come with their own distinct advantages and disadvantages.

In this blog we’re going to look at off-chain transactions.

What are off-chain transactions?

Binance Academy defines off-chain transactions as:

Transactions that occur off a given blockchain network, that may be later reported or batched together before [being] submitted to the main chain.”

Put simply, off-chain transactions are those that take place outside the blockchain.

This external functionality comes with numerous advantages including the opening up of possibilities, scalability, and improved overall operations.

Now, let’s consider how off-chain transactions actually work.

How off-chain transactions work

Because off-chain transactions take place outside the blockchain, it’s typical that the parties engaging in the transaction complete it through a third party.

The role of this external body is to act as a guarantor, confirming and ratifying the arrangement. They can also offer escrow services.

When both sides are happy with the terms and conditions laid out by the third party, the transaction is carried out, and eventually executed on the actual blockchain itself.

In many of these off-chain transactions, there is an exchange of private keys without altering ownership on the blockchain itself.

The advantage of this is that the transaction is immediate and there is no delay unlike in on-chain transactions where verification must be done by at least 51% of the people in the network.

There are various means by which payment can be made between the parties involved in this transaction. Codes or coupons might be preferred which the escrow service takes over and redeems at the agreed-upon time.

It is also possible for crypto assets to be exchanged as well.

Advantages of off-chain transactions

So why would some people resort to off-chain transactions over the customary on-chain process? Here are three major reasons:

1. Faster processing times

These transactions are easier and faster to process seeing as they do not require multi-party verification and computations.

2. Cheaper than on-chain transactions

Off-chain transactions are cheaper, relieving stress on the blockchain while also allowing savings to be made that would typically be paid as mining fees.

3. Greater anonymity

On-chain transactions while secure can give clues to who actually owns particular assets whereas this isn’t the case with off-chain. Off-chain provides greater security and anonymity.

Conclusion

There can be no doubt that blockchain technology is the future and that off-chain transactions will continue to be a major part of that evolution.

This is the first blog in a multi-series on Understanding Blockchain.

Infographic resource link:

https://finance.yahoo.com/news/study-reveals-crypto-biggest-investors-132102315.html

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David Streltsoff

David Streltsoff

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