DEFINITION of 'Off-Chain Transactions (Cryptocurrency)'

Off-chain transactions refer to those transactions occurring on a cryptocurrency network which move the value outside of the blockchain. Due to their zero/low cost, off-chain transactions are gaining popularity, especially among large participants.

BREAKING DOWN 'Off-Chain Transactions (Cryptocurrency)'

Off-chain transactions can be better understood when compared to on-chain transactions.

An on-chain transaction, simply called a transaction, occurs and is considered valid when the blockchain is modified to reflect the transaction on the public ledger. It involves the transaction being validated and authenticated by a suitable number of participants, recording of the details of the transaction on the suitable block, and broadcasting of the necessary information to the whole blockchain network, which makes it irreversible. This kind transaction can be reversed only after a majority of the network's hashing power comes to an agreement. (For more, see On-Chain Transactions.)

Essentially, every step linked to an on-chain transaction occurs on the blockchain, and the blockchain status is modified to reflect the occurrence and validity of the transaction. (For more, see What does a block chain record in a bitcoin exchange transaction.)

In contrast, an off-chain transaction takes the value outside of the block chain. It can be executed using multiple methods.

First, there can be a transfer agreement between transacting parties.

Second, off-chain transactions can involve a third-party such as a guarantor who guarantees honoring the transaction. Present day payment processors like PayPal work on these lines.

Another method for off-chain transaction is to use a coupon-based payment mechanism. A participant purchases coupons in exchange for the cryptotokens, and gives the code to another party which can then redeem them. Redemption is possible in the same cryptocurrency or in different ones, depending on the coupon service provider.

In the simplest way, two parties can even exchange their private keys involving a fixed amount of cryptocoins. This way, the coins never leave the address/wallet, but the currency receives a new owner off-chain.

Off-chain transactions offer many advantages.

First, they can be executed instantly. On-chain transactions can have a lengthy lag time depending upon the network load and number of transactions waiting in the queue to be confirmed.

Second, off-chain transactions are usually don't have a transaction fee, as nothing occurs on the blockchain. Since no miner or participant is required to validate the transaction, there is no fee, making it an attractive option for especially if large amounts are involved. On the other hand, on-chain transactions may at times come at a high cost, which leads to problems of Bitcoin Dust, a situation where small amounts of bitcoins cannot be transacted due to high transaction fees.

Third, off-chain transactions offer more security and anonymity to the participants, because details are not publicly broadcast. In case of on-chain transactions, it is possible to partially derive a participant’s identity by studying transaction patterns.

  1. On Chain Transactions (Cryptocurrency)

    On-chain transactions occur on the cryptocurrency blockchain, ...
  2. Precedent Transaction Analysis

    Precedent transaction analysis is a valuation method in which ...
  3. Blockchain

    A blockchain is a public ledger of all cryptocurrency transactions. ...
  4. Section 988

    A financial transaction involving a capital loss or gain on an ...
  5. Sharding

    Bitcoin, the original cryptocurrency, suffers from serious drawbacks.
  6. Hedging Transaction

    A hedging transaction is a position that an investor enters to ...
Related Articles
  1. Tech

    Bitcoin Transactions Vs. Credit Card Transactions

    We provide an overview of the differences between bitcoin and credit card transactions, and the advantages of using one over the other.
  2. Tech

    How Much Cheaper are Bitcoin Fees than Credit Card Fees?

    Bitcoin transaction fees are starting to rise as the network gets backlogged due to more usage, but are still much lower than typical credit card fees.
  3. Tech

    'Zero Knowledge Proofs' Could Boost Blockchain Adoption on Wall Street

    The complex mathematical proof encrypts transactions, making client and transaction privacy possible.
  4. Tech

    Will Rising Transaction Fees Bring Down Bitcoin's Price?

    Bitcoin's escalating transaction fees have raised eyebrows but experts say they won't hurt bitcoin's price.
  5. Tech

    What is a Distributed Ledger?

    Blockchain technology has come a long way from the obscure corners of the web it was once confined to. But what is it? And what about nonces, hashes and ledgers?
  6. Tech

    Public vs Private Blockchains: Challenges and Gaps

    Despite the growing corporate embrace of public blockchains, there's a slow shift toward private blockchains.
  7. Tech

    Public, Private, Permissioned Blockchains Compared

    Here are the key differences between the public, private and permissioned blockchains.
  8. Tech

    How Will Bitcoin 2.0 Change The World? (MSFT, OSTK)

    Since Bitcoin's 2009 launch, the decentralized, peer-to-peer digital currency and payment system has garnered worldwide interest.
  9. Investing

    Bitcoin Exchanges Make Transactions 20% Cheaper

    Bitcoin bulls are upbeat as they foresee more efficient transactions boosting the cryptocurrency.
  10. Tech

    Litecoin Gains Ground On Bitcoin In The Dark Web

    Litecoin may soon surpass bitcoin as the most popular cryptocurrency for e-commerce transactions on the dark web.
  1. What are the advantages of paying with Bitcoin?

    Learn how payments made with Bitcoins offer certain advantages over standard currency, including user anonymity, no taxation ... Read Answer >>
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center