The blockchain is a distributed ledger whose primary purpose is to record transactions. The characteristics of this new technology is what is making it popular, especially in terms of the secondary benefits that it offers. The difference between on-chain and off-chain transactions, being the two kinds of transactions possible on blockchain, is what many people are yet to understand.
Each of these kinds of transactions has its own unique benefit, and are mostly employed based on suitability to the parties involved. For this purpose, we will be taking a look at the uniqueness of both kinds of transactions. This will give us a proper idea of how they are applied and why each one may be preferred for a particular purpose.
On-chain transactions are what we normally refer to as blockchain transactions. It is the most popular of the two transaction types, and requires an overall update of the blockchain network.
For an on-chain transaction to be complete, there has to be an agreed number of confirmations by miners. The time it takes for an on-chain transaction to complete also depends on network congestion. Therefore, sometimes transactions are delayed if there is a large volume of transactions that need to be confirmed. However, f you want them to complete faster, you can pay a higher fee. On-chain transactions become implemented (and irreversible) only when more than 51% of the network’s participants have agreed that it is correct, and the ledger is fully updated.
Off-chain transactions is the second blockchain transaction variation. They differ from on-chain transactions in a number of ways.
Off-chain transaction agreements happen outside the blockchain. This protocol employed with off-chain transactions is similar to what is used on payment platforms like PayPal.
The parties involved in the transaction can choose to have an agreement outside of the blockchain. The next step could also involve a third party, whose role is to confirm the completion of the transaction and certify that the agreement has been obeyed. This makes the third party a kind of guarantor in the transaction.
This is the model that is adopted by most decentralized exchanges today, where the exchange plays the role of an escrow. It provides the platform and rules for transacting. Once parties agree on terms outside the blockchain, the actual transaction is then executed on the blockchain.
In many cases, the use of codes or coupons can be adopted during off-chain transactions. These are redeemable codes or coupons that can be exchanged with the crypto assets. The third party holds the codes or coupons, and is responsible for redeeming them at the right moment.
Off-chain transactions can also be executed via the exchange of private keys by the parties involved. Using this routine, the crypto assets involved will not leave the wallets. What happens is that ownership is changed without altering the blockchain. This makes the transaction instant and without delay.
Combining Both On-chain And Off-chain Transaction Systems
For particular reasons, some platforms combine certain aspects of both on-chain and off-chain transactions to achieve what is known as hybrid transactions. This mostly happens when the conditions require instant transactions that are not costly, and at the same time needs to be decentralized. This implementation neutralizes the difference between on-chain and off-chain transactions.
A typical platform where this is applicable is on Vertex.Market. Being a peer-to-peer platform, the trade volumes that occur on Vertex differ from trade to trade.
The cryptocurrency market is very volatile and prices can change significantly over short periods of time. With the kind of volumes traded on Vertex, this can come into play when transactions are not instant. However, while we consider these factors, it is also necessary that transactions are decentralized. This will enable transparency of contracts and the execution process.
Considering the above mentioned factors, Vertex implements a system that has crucial elements from both transaction systems. This is why it is called a hybrid transaction protocol, combining both on-chain and off-chain transactions.
This system ensures an open and transparent trading environment that is not controlled by any particular individual or group. It takes into account the difference between on-chain and off-chain transactions. At the same time, it ensures that transactions are instant without unnecessary delays.