Crypto WOTD — Off-chain vs On-chain

What's up CAPPIES! After some intense research on yield farming in the previous article, let's get back to some simple basics of the crypto world for today.

BLOCKCHAIN

Before we dive deeper into the topic for today. We first need to understand what a blockchain is. In its simplest form, the blockchain is a distributed ledger whose primary purpose is to record transactions. In this distributed system, each computer (node) must retain a copy of the ledger. The beauty of this distributed system is that it reduces the risk of corruption by any individual person or group #decentralisation.

ON-CHAIN VS OFF-CHAIN

On-chain transaction simply refers to a transaction made on the blockchain itself — a modification has been made on the blockchain.

Note: Any on-chain transaction can only be implemented AND irreversible IF >51% of the network participants have agreed it is correct, thus the ledger will be fully updated accordingly. (aka consensus mechanism)

Off-chain transactions in other words, refer to a transaction made OUTSIDE of the blockchain. This can be executed using multiple methods
1) Via a transfer agreement between transacting parties)
2) Escrow (third party guarantor) — Once the parties agree on terms outside the blockchain, the actual transaction can then be executed on the blockchain itself
3) Coupon-based payment mechanism — Coupons can be exchanged/redeemed and the actual transaction can be executed on the blockchain after.

BENEFITS OF OFF-CHAIN

Pretty much straightforward here.
1) SPEED — can be executed instantly whereas on-chain transactions will take some time as it needs to accumulate enough confirmations to ensure that they cannot be reserved.

2) ANONYMITY — All on-chain transactions are publicly recorded on the blockchain itself; On the other hand, because off-chain do not happen on the blockchain they need not be public! Using various cryptographic techniques, it can also be made IMpossible for third-party operators to determine the parties of a particular transaction.

3) COST — Well they do not transact on the blockchain itself so they usually do not have a transaction fee. (probably miniscule fees for certain cases)

4) SCALABILITY— Bitcoin for example has a limit of 7 transactions per second aka the blocksize limit. In order to achieve higher transaction volume, certain transactions will need to happen off-chain. There is no way to query every single minute detail off the blockchain AND still be expecting high speeds and volumes.

Relatively simple learning point for today CAPPIES. As usual, Google is your best friend and th3cappy is always here to assist!

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