Off Chain vs On Chain Crypto Transactions Which is Better?

You can speed up crypto transactions by using off-chain transaction methods.

Knowledge is power; when it comes to cryptocurrency, the more you know, the better financial decisions you will make. There is a lot to learn in the cryptocurrency space, such as how the different layers of blockchain technology work and which blockchain has the fastest transaction speed. Another important thing you need to know about blockchain transactions is the differences between off-chain and on-chain transactions – and which one can save you more money!

Simply put, on-chain transactions occur within the blockchain network, and off-chain transactions occur outside the blockchain network. Let’s take a closer look at their differences to find out which one you should choose for your next crypto transaction.

Differences between on-chain and off-chain transactions

Transaction Process

With on-chain transactions, all relevant information is time-stamped and stored in the ledger. The computers (or nodes) on the blockchain network confirm these transactions based on the consensus mechanism (e.g. proof-of-work [PoW] or proof of effort [PoS]) the chain uses. For PoW blockchain networks, it can take a lot of computing power to verify transactions and add new blocks to the chain. The intensive energy required will greatly pollute our environment and accelerate global warming.

On the other hand, you can perform off-chain transactions in one of these three ways:

• the parties involved may use a transfer agreement;
• one party may purchase vouchers instead of crypto tokens and then provide the code for said vouchers to the other party; or
• they may use a third party as guarantor for the transaction.

Common third-party guarantors are layer-2 solutions (which aim to solve the scalability issues present in the blockchain) specifically designed to reduce the load on the main blockchain. Some of these include Lightning Network and Liquid Network.

Transaction speed and costs

Since chain transactions must be verified by multiple nodes controlled by miners, processing one can take a long time if there are many transactions queued up. To motivate the miner to prioritize your transaction over others, you need to pay a high transaction fee. The higher the transaction fee you are willing to pay, the faster the transaction will go through. This can become a big problem, especially in the case of smaller trades where the amount to be transacted is lower than the fee itself.

Since off-chain transactions do not need to be verified by multiple nodes like on-chain ones, they tend to go through at an almost instantaneous rate. They do not involve miners and therefore have no transaction costs.

Security and transparency

Since transactions on the chain are recorded and time-stamped, no one can change or reverse them, making them highly secure and transparent.

When it comes to off-chain transactions, the level of security varies depending on the way you perform the transaction. If you use a layer-2 solution (eg Lightening Network), a side channel will be created between the parties involved. Once the transaction is completed, the side channel will be closed and the transaction can be recorded on the main blockchain. In other types of off-chain transactions, there may be no record of the transaction to assist any of the parties involved in the transaction in case of conflict.

The higher level of transparency for transactions in the chain comes at the expense of anonymity. Since the details of chain transactions are secured in a publicly distributed ledger, the transaction patterns make it possible to at least partially identify the parties involved in the transaction.

In contrast, off-chain transactions are not available to everyone, which provides more privacy. Even off-chain transactions processed with layer-2 solutions, which may leave a record on the main chain, are encrypted and inaccessible until the chain is closed, ensuring the anonymity of the parties involved.

So which one should you choose?

Whether you are a cryptocurrency novice or an avid investor, everyone is looking for a way to make the smartest financial decision and get the best possible return on their crypto investments. To do that, you want the costs incurred for each transaction to be as low as possible.

On May 1, 2022 – before “The Merge” in September, which took Ethereum from proof-of-work to proof-of-stake – the average transaction cost on the Ethereum Network reached an all-time high of $196. The number has been between USD 10-1 from June until now. For Bitcoin, the average transaction cost has been somewhere between USD 4.5-0.7 since this year. These costs can add up with every transaction you make and eat away at your crypto reserves if you’re not careful.

Although it is recommended that you use the off-chain method for larger transactions, whichever method you should choose depends on your priorities. If your goal is to have a secure transaction that can be securely documented on the blockchain, the on-chain method may be the right choice for you. However, if you want your transactions to go through quickly and without large transaction costs, off-chain methods may be the way to go. Either way, knowing the options available can help you make a smart choice every time.

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Top image courtesy of Freepik