On-chain and off-chain transactions

On-chain and off-chain transactions

When creating the world's first cryptocurrency, developers worked to find a solution to the idea of free flow of funds without the participation and control of these processes by third parties. And they succeeded, the final product is called Bitcoin, which allows to make money transfers to each other without intermediaries.


Principle of on-chain transactions

The essence of using blockchain technology in cryptocurrencies is to record all movements (transfers, transactions) on the network, which cannot be changed. Every transaction, even the smallest one, will be recorded in the blockchain "log". This principle is called an on-chain transaction.

But, the use of this principle encountered a network bandwidth problem, because due to the large number of transactions, miners did not have time to confirm transactions made by users. This forced developers around the world to think of a solution to the problem of poor network bandwidth. One of these solutions was the introduction of off-chain transactions.


Principle of off-chain transactions

The point of use is to make the blockchain more scalable and anonymous, and transactions within the network as fast as possible. From a technical point of view, all transactions are made within the cryptocurrency network, but outside the main blockchain. This approach involves writing only the initial and final result of a transaction to the blockchain, with all other transaction validation activities taking place outside the blockchain.

The main issue when implementing this principle, is the choice of method to validate these transactions. At the moment, there are several solutions that allow transactions outside of the blockchain and one of them is the Lightning Network technology.


Where on-chain and off-chain transactions are used

Every cryptocurrency that uses the classic blockchain at its core performs on-chain transactions. Bitcoin and Ethereum are among these cryptocurrencies, but they may soon switch to using a different principle, because in both cryptocurrencies the issue of network scalability remains open.

The principle of off-chain transactions began to occur more and more often in new projects, their main goal is to provide functionality similar to the 1st and 2nd cryptocurrency, but with a solution to the issue of bandwidth.

As written above, the most popular solution for using off-chain transactions is the use of Lightning Network technology. At the moment, it is fully implemented in Litecoin cryptocurrency.

But, there is another solution to solve the above problem - it is the use of so-called sidechains. This solution is used in Lisk cryptocurrency.