What is an On-Chain Transaction?
On-chain transactions are the type of blockchain transaction records that are recorded on the public ledger. Therefore, on-chain transactions are visible to all the participants on the network.
Furthermore, on-chain transaction records are more popular in comparison to the off-chain transaction records.
How do On-Chain Transactions Work?
Blockchains are distributed ledgers meaning that they have to record verified transaction records on a block. Once a transaction is initiated it is encoded with a unique cryptography code.
The user is asked to add a minimum transaction fee depending on the trading volume on the network at any given time. From there the transaction is sent to the network validators or miners. The miners or validators complete the process of transaction verification based on the native consensus model method.
Now the transaction is ready to be added to the new block. Once a verified transaction is added to a block it cannot be changed without gaining control of the majority hash power on the network.
On-chain transactions are longer in comparison to off-chain transactions because they are validated by the network participants on account of computational power usage to find the encryption key. At the same time, on-chain transactions are completed when the majority portion of the nodes on the given network agree on their authenticity.
Advantages of On-Chain Transactions
On-chain transactions allow users to benefit from the immutability of distributed ledgers. It means that once a verified transaction record has been added to the ledger it is irreversible.
Furthermore, all the blockchain on the network are timestamped and encoded with hashes. At the same time, each transactions on-chain is stored on each network node in a synchronized manner.
On-chain transactions are recorded in a distributed manner and eliminate a single point of failure. It means that network is protected against vulnerability to hack attacks.
Furthermore, in case of a few nodes going offline the remaining nodes can continue to keep operating allowing the blockchain network to remain active at all times. At the same time, all the transactions on the blockchains are validated and viewable by all the network participants.
Disadvantages of On-Chain Transactions
On-chain transaction speed can be slow for the duration when the trading volume rises. Under such a scenario, transactions can line-up or lag awaiting verification.
On-chain transactions do not ensure privacy or anonymity for its investors. In contrast, these records are visible to all the users operating on the network.
On-chain transaction charges are very high account of limited scalability of a blockchain network and can experience lags during rising trading volume.
What are Off-Chain Transactions?
Off-chain transactions are carried out outside of a blockchain network. They are based on different types of methods/agreements. Off-chain transactions usually take place between two independent investors in a peer-to-peer manner.
The parties making off-chain transactions usually rely on a digital transfer agreement. It is important to note that off-chain transactions also take place through third-party payment applications.
In other cases, off-chain transaction requires exchanging wallet addresses or unique transaction IDs. There are also instances, where the users conducting off-chain transaction create a new multi-sig wallet and share the private key. Funds are sent to the new wallet that allows the users to change ownership.
How do Off-Chain Transactions Work?
The basic tenet of off-chain transactions is that they take place outside of a blockchain network. There are many ways to conduct them. Here are some common methods to make off-chain transactions:
The pegging system allows the network users to move coins between the main chain and sidechain.
Peer-to-peer transactions take place using multi-sig wallets such as Bitcoin Lightening Network.
Debit and credit transactions take place between two trusted users.
Trusted Third Parties
In this method, users make transactions through a trusted third-party channel such as Block basis.
Advantages of Off-Chain Transactions
Off-chain execution takes place when the transactions do not validate transactions.
Off-chain transaction does not have any transaction fees or obligations or they are very minute in comparison to an on-chain transaction.
Off-chain transactions are more secure and private in comparison to on-chain transaction records. That allows the consumers to maintain high security and anonymity.
On-chain and off-chain transactions both exist in the form of data. Both types of transactions share some similarities and differences in comparison to each other with relevant benefits and limitations.