Since it is a relatively difficult topic for the newbies, let us just have a comprehensive background of off-chain transaction procedure and compare it with its significant other.
Difference between on-chain and off-chain transactions?
Both of these terms are related to blockchain governance, which refers to the decisions being made on the network and committed to the chain. Primarily, there are two types of decisions that a network has to make. The first one relates to the economic dealings (mostly happens in permission less blockchain networks and covers mining) between different peers. The second type of decision making covers a very wide area of protocols and rules that are incorporated in a network to achieve decentralization and efficiency.
There is absolutely no doubt in the fact that in order to maintain a transparent environment, we need governance. But how the decisions in a governing protocol are executed and in which environment are they executed, happens to be a debatable topic. This is where on-chain and off-chain transactions come into play.
Let’s have a look at the on-chain transaction method for a moment. Basically, it refers to updating the public blockchain ledger in real time, without any delay, whatsoever. The logic of the decision-making algorithm demands that a set number of peers verify and validate a transaction before it is finally recorded as an immutable record on the ledger. But since everything has to happen on a live network and several steps are involved, it may take longer than the off-chain transaction to reach the same decision.
Talking about the off-chain method, it can be carried out in numerous ways, hence the developers are at the liberty to utilize an approach that is way more efficient and wallet-friendly for the participants. The primary approach is to use a transfer agreement between two peers to carry out a transaction and validate it. Secondly, two peers can request a third party to verify that the transaction they have carried out is authentic before committing the details to the ledger. Moreover, the method also allows users to carry out transactions with the help of coupons (for payment). In order for such a procedure to work, the peers need to buy coupons by paying in particular cryptocurrencies (as demanded by the network). Then, the code bought against the coupons is sent to third parties so they may be able to redeem it.
Here, one of the core things to be noticed is that in an off-chain transaction, the peers or nodes are at (somewhat) liberty. It implies that they have the autonomy to decide whether they want to commit a change to the leger or not. Therefore, their decision has a direct impact on the entire community belonging to a network. However, all transactions conducted on an off-chain network are instantaneous, unlike the on-chain network. But since these transactions or rather governance decisions do not happen on a blockchain, they can be altered before finally being committed. So we cannot say that this procedure is not secure, but rather it allows entrepreneurs to develop systems with varying security levels, depending upon the requirements of the use case(s).
The perks of off-chain transactions
Let’s have a look at an array of benefits offered by off-chain transactions, particularly in contrast with the on-chain method.
You must be thinking that blockchain is meant to offer security then why is there a difference between on-chain and off-chain transactions. Well, no doubt it is meant to offer security, but different procedures allow varying levels of security. For instance, if you think that BTC transactions are absolutely anonymous, you are not quite right. To some extent, your ID on the network can be traced (it does not mean that someone could crawl up the web and find out your Facebook profile picture).
But off-chain transactions are way more private. Since they do not happen on the live chain, their details are not recorded on the public ledger. In some cases, even network admins are not authorized to extract the identities of peers involved in a transaction.
We have already discussed this perk briefly in the above sections. Let’s explore it again in detail.
As soon as the transaction is confirmed after validations from the peers, it is recorded on the public ledger and once it is committed, the details cannot be deleted or altered. Contrary to this, an on-chain network requires several validations from an array of peers and that too, on the live network. At some instances, it creates a bottleneck situation which hinders the speed and efficiency of the network.
Typically, in a mining environment, miners charge some fee for confirming a transaction. Over the years, this fee has increased and due to many users on the network, the time it takes for confirmation is also not practical. In order to diminish this bottleneck situation and allow a ‘parallel scheme’ to share the workload of the main chain, we could make use of the off-chain method to execute low-value transactions.
Didn’t get it?
See, high-value transactions are way more important and in some cases, the safest way to conduct a trade is on-chain. However, when you do EVERYTHING on the live network, the throughput is reduced. All HighBank is doing is conducting some of the transaction off-chain and some on-chain.
Don’t worry you will be safe whatsoever. It just happens to be an approach for allowing better usage of the network.
Apparently, by just skimming through the heading, it might seem as if off-chain is not as secure as its significant other. However, we need to broaden our mind and understand a simple fact that blockchain is meant to offer security and anonymity, but the level of each of them can be varied depending upon the use case we are trying to implement. For instance, an intelligence agency’s blockchain network needs way more efficiency and security than a coffee tracker. I hope you have developed a sense of it now…