Ray Odi Ray is an astute crypto writer that loves penning content on cryptos, DeFi and other blockchain-based platforms.

On-chain vs Off-chain transactions: What’s The Difference?

1 min read

the left side represents an on-chain bitcoin setup vs the right side which represents an off-chain wallet faraway from the left side.

The finance world is taking a new shape, and this evolution has brought the need for a cryptocurrency vs traditional currency comparison. People are dumping fiat currencies and giving cryptocurrency a chance because of its incredible features. A stroll through the Internet will see two groups having different ideas and arguing about cryptocurrency vs traditional currency comparison. Some feel that crypto is a fad, and will soon be a thing of the past, while the other group thinks that it is here to stay. In this article, we explain the difference between On-chain vs Off-chain transactions

Comparing On-chain vs Off-chain Transactions

Usually, people purchase cryptos like Bitcoin on crypto exchanges, and either store them on those exchanges or move them to a private wallet. When a user decides to buy crypto and store it in an exchange, the exchange merely updates their internal database with the user’s ownership of the crypto. This is an off-chain transaction.

On the other hand, if the user decides to send the purchased crypto to a private wallet, the exchange will no longer have the crypto. This is an on-chain transaction. 

What are On-chain Transactions?

On-chain transactions are called blockchain transactions, and they require the updating of the blockchain network. When a user has gone past the cryptocurrency vs traditional currency comparison narrative, they begin to wonder how the on-chain transactions differ from their counterpart.

Before an on-chain transaction is completed, the transaction has to go through a stipulated number of miners or validators who validate the transaction. The confirmation process may take some time based on how congested or free the network is. When there is congestion, the transaction may be delayed and the transaction fee may be higher.

On-chain transactions usually occur when a user decides to send crypto from an exchange to a private wallet and vice versa. It could also occur when a user decides to send another user cryptocurrency. Those that subscribe to on-chain transactions have to properly safeguard their private keys because, without them, they have no recourse to recover their funds.

Off-Chain Transactions: Explained

Reputable exchanges tend to insure the cryptos of their users up to a certain amount. Off-chain transactions occur when a user buys crypto in an exchange, then stores it with the exchange. In this case, the exchange has the private key and ensures that it is backed up and secured.

When a user buys crypto, say Bitcoin, on an exchange, the exchange creates an internal database entry to show that the user is the owner of the Bitcoin. This entry is kept off the chain. Off-chain transactions are tracked by the exchange itself and do not change the state of the actual blockchain.

A person buys crypto in a reputable exchange like Binance or Coinbase, this transaction is updated outside of the blockchain, in the exchange’s personal database, and not the blockchain itself. In an off-chain transaction, Binance will store the crypto for you, and probably insure it. In case, the exchange is hacked, the user loses their funds, except if an insurance protocol was taken out by the exchange. If a user forgets the log-in details to their account on an exchange, it is possible to retrieve it, but that is not the case for users that forget their private keys to their private wallets.

Ray Odi Ray is an astute crypto writer that loves penning content on cryptos, DeFi and other blockchain-based platforms.