Blockchain technology has been transforming the whole system of digitalization across industries. The main benefit of blockchain offerings is to have a lease on the transparency of transactions for both the beneficiary and the grantee. Organizations in the recent age have been managing data for blockchain-based solutions either as on-chain or off-chain as storage mechanisms. This can be implemented as storing data in a private or publicly accessible service blockchain service. Off-chain does not necessarily mean “not on the blockchain,” it basically means that it’s not on a publicly accessible service. Just like any organization would not store their data on a publicly accessible database or directory, off-chain storage means that the data is not publicly accessible. If you apply these concepts to a traditional cloud service, it would be very similar to a public cloud versus private cloud.
In my experience, off-chain transactions bring huge value as they have increased security and are also not bound by the transactional speed limitations that on-chain transactions have. In a typical on-chain transaction each transaction would need to be confirmed by all nodes on the chain before the transaction is marked completed, and this makes it very slow, whereas on an off-chain transaction does not need to wait for all the nodes to confirm the transaction before its marked as complete or successful. Since off-chain systems are not public internet-facing its more secure — it’s very similar to the security you would attain by installing a server or a piece of software within your intranet as opposed to the internet.
On-Chain Transaction: These transactions are valid when transacted on the public ledger. They involve many participants verifying transactions and the validations signatures from all participants need to be an exact match in order for that transaction to be considered valid. While the specifics of each transaction are published on the public blockchain for inspection so that they cannot be changed or reversed back, it may take more time compared to that of off-chain transactions. Also in addition to this, there is very likely potential that the transaction costs could be expensive, because of which members may prefer the off-chain system.
Off-Chain Transaction: According to an article from IBM, off-chain transactions deal with “values that are outside the Blockchain and can be completed using a number of methods.” Both parties must agree about the transfer, then, another party comes in to validate the transaction. Even coupon-based transactions can be implemented by leveraging the off-chain method. The parties or the individuals who are involved in the transaction must buy the coupons as an exchange for the cryptocurrency and share the details to the third party who claims them. Any sort of transaction which is conducted by off-chain is quite fast and instantaneous without the higher fees of on-chain transactions.
Advantages To Off-Chain Transactions Over On-Chain Transactions
There are several reasons why an off-chain storage mechanism may be one of the main considerations when architecting a blockchain solution. One common use of off-chain storage can be to support a cache of the most recent values of the state of on-chain data or to hold up direct for advanced search and analytics. Off-chain data storage systems can be easily used as a backup to contain the large amount of artifact application data. This is done by using the point-in-time artifact data which is stored off-chain. Another important factor of the off-chain system is that it can easily store any type of real sensitive data. As on-chain data is non-negotiable in terms of modification, this sort of problem does not arise with the off-chain data management system.
A few of the obvious advantages are:
• It’s faster. The transactions are recorded instantly, without having to wait for the network confirmations.
• It’s cheaper. Transactions done off-chain are usually free.
• It’s more private. These transfers are not visible on the public blockchain.
Consider a transaction like a cross-border crypto asset transfer, or a trade. An on-chain transaction is best suited as it brings complete transparency and audibility to the transaction itself. Let’s expand on that a bit further. Let’s assume Alice sends 10 bitcoins to Bob. Now if this is an on-chain transaction it’s public knowledge and proof that Alice did send “10 bitcoins” to Bob and the proof (on the public domain) that Bob did receive “10 bitcoins.” Now let’s co-relate that the exact same transaction to an off-chain transaction with a hash (or a proof) of that transaction pegged to the public blockchain. In this scenario, it’s proof that Alice sent “something” to Bob and Bob received “something” is public knowledge. However, the exact number of bitcoins transferred stays rooted in the sidechain and is not public knowledge.
On-chain transactions are best for cryptocurrency transfers, whereas off-chain are non-crypto related. A good example of this is the use of decentralized identifiers (DIDs). A DID could be public domain knowledge and could be pegged to the public like Bitcoin. However, the personally identifiable information (PII) associated with the DID, remains pegged on a sidechain that only you have access to and you could choose whom to share the PII data with, when, where and how, which really puts you in complete control of your identity information on the blockchain.
On-chain and off-chain transactions each have pros and cons depending on the use case. So I leave you with this: Off-chain does not necessarily mean not on the blockchain, it just means that it’s not on the public blockchain.