What Are On-Chain Transactions?

On-chain transactions refer to cryptocurrency transactions that occur on the blockchain and remain dependent on the state of the blockchain for their validity.

All such on-chain transactions occur and are considered to be valid only when the blockchain is modified to reflect these transactions on the public ledger records.

Key Takeaways

  • On-chain transactions refer to transactions that are recorded and verified on the blockchain.
  • Off-chain transactions are all other transactions, like buys a candybar with cash or using an electronic payment system like PayPal.
  • The speed of on-chain transactions depends on the verification method of the blockchain (for example proof of work versus proof of stake).

Understanding On-Chain Transactions

A transaction is a transfer of value in a particular cryptocoin token, the details of which are recorded on suitable blocks of the blockchain, and the same are broadcast to the whole cryptocurrency network after suitable verification.

Depending upon the network protocol, once a transaction garners sufficient confirmations from network participants based on the network’s consensus mechanism, it becomes almost irreversible. (It can only be reversed if the majority of the blockchain’s hashing power comes to a consensus to reverse the transaction.)

On-chain transactions are supposed to occur in real time in order to keep blockchain transactions secure, verifiable, transparent and instantaneous. However, in reality, it rarely happens that way, and on-chain transactions come with a few disadvantages.

On-chain transactions rarely occur instantly, as it takes a random duration of time to accumulate a sufficient number of verifications and authentications from the network participants before confirming a transaction. For instance, if the transaction volume is high, a limited number of miners/nodes may take their time to confirm a transaction, which makes the other parties to the transaction wait for a resolution.

Public broadcasting and recording of on-chain transaction details may also provide sufficient pointers to link addresses to participants’ identities, thereby posing a threat to the anonymity feature of the blockchain and security of its participants. For instance, it is possible to partially know a user’s identity if one carefully studies the transaction patterns of sends and receipts around the same addresses, like those used for purchasing online goods.

On-chain transactions also come at a cost, as miners command a fee for offering their validation and authentication services for confirming a transaction on the blockchain in the shortest possible time. At times, this fee can go very high depending upon the network’s scalability potential and transaction volume. For instance, high fees have led to the problem of Bitcoin Dust, where fractional amounts of bitcoins cannot be transacted due to high transaction fees.

On-chain transactions also offer many advantages. During the initial phase of a blockchain when the transaction volume is low and the fee is zero or very small, on-chain transactions offer instant settlements. New network protocols and cryptocurrencies that are aimed at keeping the transaction time and fees to a minimum while providing instant settlement are making their way into the mainstream.

Real World Examples of On-Chain Transactions

Two coins with relatively fast transaction speeds are NEO and Nano, both of which are under 15 seconds block time. Burstcoin (BURST) is another coin that not only has faster block time than mainstays like Bitcoin, it also uses far less energy to mine coins because of its proof of capacity system.

Once verified and confirmed on the blockchain, on-chain transactions cannot be reversed unless the majority of the network’s hashing power agrees to do so, making on-chain transactions more reliable and fraud-resistant.