# Off-Chain Transactions: Definition, Advantages, vs. On-Chain

## What Are Off-Chain Transactions?

Off-chain transactions refer to cryptocurrency transactions that are processed for a primary blockchain by a second-layer or other chain. This is done to reduce transaction costs and processing times. Off-chain transactions can be contrasted with on-chain transactions.

### Key Takeaways

*   In blockchain-based cryptocurrencies, off-chain transactions refer to those that occur on second-layer solutions for a primary blockchain.
*   Off-chain transactions help lower fees, decrease settlement times, and provide more anonymity than on-chain transactions.
*   Off-chain transactions are eventually recorded on a network's main blockchain through various techniques.

## Understanding Off-Chain Transactions

In its most basic form, a blockchain transaction is a transfer of value between two parties. One person transfers ownership of a unit of value to another, and the [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) records this transfer in a file (a block).

Blocks are full of transaction information. In fact, transactions make up the largest data field in these blocks. Before processing, transactions are placed into a queue and then selected by nodes to be included in the blocks they propose and process. On more popularly used blockchains, a backlog of queued transactions can slow down a network and increase fees.

To prevent this bottleneck and keep fees as low as possible, developers created blockchain assistance programs commonly called second-layer blockchains or applications. These programs process transactions for primary blockchains and then send the information to those blockchains to be included in blocks.

Processing transactions off-chain in this manner creates a faster and cheaper blockchain.

## Off-Chain Transactions Advantages

There are several benefits to off-chain transactions:

*   They can be executed much quicker than on-chain transactions.
*   They have lower transaction fees, as the processing occurs off the blockchain.
*   Off-chain transactions can offer more security and anonymity to participants because details might be rolled or summarized and not broadcast publicly.
*   They offer scalability options for blockchains that struggle with increased traffic and use.  
    

## Off-Chain Transactions Disadvantages

There are several distinct off-chain disadvantages:

*   The immutability often advertised by blockchains can be compromised as the off-chain networks might not be as secure or reliable as the primary blockchain.
*   Lower security means there are more opportunities for hackers and thieves to alter data being sent to the primary blockchain.
*   There is a [counterparty risk](https://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp) in that users must trust the parties that created the off-chain solution.
*   Legally, ownership of transferred cryptocurrency through an off-chain transaction occurs, but the cryptocurrency is not updated on the blockchain until it is broadcast to the primary blockchain. If this lag is not accounted for by developers, it could be exploited.

## What Is the Difference Between Off-Chain and On-Chain Transactions?

[On-chain transactions](https://www.investopedia.com/terms/c/chain-transactions-cryptocurrency.asp) are processed and recorded by a primary blockchain network. Off-chain transactions are processed by a second-layer network and sent to the primary blockchain for recording.

## What Is an Example of an Off-Chain Transaction?

The Lightning Network processes transactions off-chain by opening channels between users. A channel allows users to transact multiple times without incurring fees for each transaction. Once the channel is closed, the transactions are summarized and sent to the Bitcoin Network in one transaction.

## What Is an On-Chain Transaction?

Transactions are considered on-chain if they are processed and recorded by a primary blockchain.

## The Bottom Line

Off-chain transactions are cryptocurrency transactions that are processed off a primary blockchain by another network. They are sent to the primary blockchain by the network when certain conditions are met. This reduces the primary blockchain's workload and transaction fees but introduces counterparty risk and the risk that the secondary network could be attacked by hackers.

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