By Nick Marshall
Every 2.58 seconds, on average, a new Bitcoin transaction is ready to be recorded on the blockchain digital ledger. That might be a fraction of the volumes that the major payment providers handle, but a Bitcoin transaction is a complex process. It doesn’t have to be, however. Just as crypto traders can choose to store their coins in either a hot wallet or cold wallet, they can choose between offchain or onchain for transactions. Find out why there could be some attractive advantages to choosing the former.
What’s the Difference Between Offchain vs. Onchain Transactions?
In theory, crypto transactions happen in real-time, but in practice, each one must go through a verification stage that imposes a delay. With an onchain transaction, that service is provided by crypto mining. It’s a lucrative business that requires considerable processing power. Crypto miners solve the algorithms that allow new data to be added to the blockchain. The entire transaction takes place within the blockchain, from linking the sale or purchase to a Bitcoin address to generating the private key which keeps the transaction secure. Miners receive fees for every transaction they “solve”, which vary according to the size and volume of network traffic.
Offchain transactions, on the other hand, take place outside the blockchain. The transaction is mutually agreed upon between buyer and seller and is both validated and guaranteed by a third party. The funds themselves need never leave a private wallet, but their value is transferred between parties. The simplest methods of completing an offchain transaction are:
- Swapping the private keys to a wallet directly between two parties. This transfers access to the assets from one owner to another, but not the coins themselves.
- Using a third party to guarantee and validate the transaction (similar to the way PayPal transfers funds). Transactions from one Coinbase wallet to another, for example, occur offchain, with the exchange acting as a third party.
- Converting the cryptocurrency value into a redeemable coupon that is then exchanged between parties.
The key difference between offchain and onchain is that an offchain transaction requires no changes to the blockchain. Consequently, transactions are genuinely instantaneous and incur no additional fees, since there is no mining involved.
The Advantages and Disadvantages of Each
Unlike the hot and cold wallet debate, security isn’t the deciding factor when it comes to the choice between onchain and offchain transactions. For a start, the onchain registry is historically secure and while the exchanges themselves might be vulnerable to hacking, the Blockchain has a built-in resilience. Moreover, the onchain registry has enjoyed almost 99% uptime since its inception.
The problem with onchain transactions is the speed and cost. Transactions are only valid once the public ledger is updated, and that can take time when volumes are high. The corresponding fees rise to levels that some traders may find prohibitive. A further drawback is that transactions cannot be changed once they have been validated. They’re publicly available too, so there’s the prospect of linking back a sale to a wallet or identity, even if the process is convoluted.
Offchain transactions, by contrast, are fast and free. The transactions will eventually have to be recorded on the Blockchain, but it’s possible to make an instant trade at no extra cost without delay. Since these trades are not publicly viewable, there’s also a greater degree of anonymity.
What TransitNet’s Offchain Title Registry Means for your Transactions
Since TransitNet offers the first offchain title registry, transferring legal ownership of cryptocurrency is seamless and secure. That’s a particularly alluring proposition for high-value or volume transactions where anonymity is required. For example, title can be transferred for loan collateral or valuation without having to hand over the assets themselves.
Without a secure offchain title registry, this trust would be difficult to emulate because the only way to establish asset ownership would be through the private key. If that key is lost, the assets follow. Ultimately, offchain transactions lend a degree of fluidity to crypto trading that complements the security of onchain transactions. In other words, offchain preserves the most appealing feature of Blockchain — the absence of overall control — but accelerates the process for validating transactions without an all-seeing institution in charge.
Investopedia – On Chain Transactions (Cryptocurrency)
Investopedia – Off-Chain Transactions (Cryptocurrency) Definition.
Forbes – On-chain vs off-chain