On-Chain vs Off-Chain Transactions
Key Takeaways
- On-chain transactions occur directly on the blockchain, offering benefits like immutability, transparency, and security but with higher costs and slower speeds.
- Off-chain transactions happen outside the blockchain. They sacrifice security and transparency but offer lower costs, faster processing, and scalability.
- NFTs can also use on and off-chain storage options, storing metadata either on the blockchain or on external servers.
- Both on and off-chain transactions have advantages that fit different use cases, and you’ll encounter both as you explore the dApp ecosystem.
Blockchain technology has introduced new ways to transact. Every transaction on a blockchain is verified by a network of nodes and stored forever on an immutable ledger. This technology has given rise to a booming ecosystem of DeFi, NFT platforms and dApps that make use of these on chain transactions to deliver services.
But even in the blockchain ecosystem, not every interaction is recorded on the blockchain – and for good reason. In this article, we will break down the differences between on-chain and off-chain transactions, their advantages, disadvantages, and their implications in the world of NFTs.
What are On-Chain Transactions?
An on-chain transaction is a type of transaction that occurs directly on the blockchain and is verified and recorded by the network’s nodes. Once confirmed, the transaction becomes part of the blockchain’s permanent ledger. Its is stored on the blockchain, and is accessible to anyone.
Why Execute a Transaction On-Chain?
Transactions carried out directly on the blockchain offer several benefits. These include:
- Immutability: Once recorded, these transactions cannot be altered or tampered with. Immutability guarantees the integrity of the data.
- Transparency: All participants in the blockchain network can view and verify the transaction details, increasing trust among users.
- Security: On-chain transactions are secured by the blockchain’s consensus mechanism, ensuring that no single entity can manipulate transaction data.
Limitations of blockchain transactions
But there are disadvantages as well:
- Costs: Executing transactions on-chain can be costly, especially during periods of high network activity. During the surge in popularity of Ethereum-based NFTs, transaction fees soared, making small transactions impractical.
- Speed: Blockchain transactions can be slow, particularly on networks that rely on a high number of confirmations. Bitcoin transactions can take from minutes to hours to fully confirm.
- Storage: Transaction data stored on the blockchain occupies a small portion of the network’s limited data storage capacity. Each time you move the data to a different location on the blockchain, your fees will be a function of that storage space.
What Are Off-Chain Transactions?
Off-chain transactions refer to transactions that happen off the blockchain. The data of the interaction is not recorded on the blockchain itself, and is instead noted on a secondary system such as a different network or a website database. The data on the blockchain does not change, the transaction does not require to be processed by the network’s nodes and it is likely reversable.
Why Execute a Transaction Off-Chain?
There are a number of advantages to executing a transaction off the blockchain, even within the dApps and DeFi ecosystem:
- Lower Costs: Since off-chain transactions bypass the blockchain’s native transaction fees, they are typically much cheaper to execute.
- Speed: Off-chain transactions are processed much faster than on-chain transactions because they do not require verification by multiple nodes in the blockchain network.
- Scalability: Without the limitations of the blockchain network, off-chain transactions can handle a large volume of transactions.
Despite these advantages, off-chain transactions come with certain trade-offs:
- Security: Off-chain transactions lack the decentralized security of the blockchain’s consensus mechanism. They rely on third parties, making them vulnerable to manipulation.
- Transparency: Since off-chain transactions aren’t recorded on the blockchain, they lack the same level of transparency as on-chain transactions.
Comparing On- and Off-Chain Transactions
Both on- and off-chain transactions have their respective benefits and drawbacks. Here is a comparison:
| Element | On-Chain Transactions | Off-Chain Transactions |
|---|---|---|
| Security | High due to blockchain consensus mechanisms | Lower; reliant on trusted third parties |
| Immutability | Fully immutable once confirmed | Not immutable until reconciled on-chain |
| Costs | High, especially during periods of network congestion | Low or negligible transaction costs |
| Scalability | Limited by blockchain network capacity | Highly scalable; can process large volumes fast |
On-Chain and Off-Chain NFTs – What’s the Difference?
The discussion of on- and off-chain interactions extends beyond just transactions: It also plays a key role in the world of NFTs and their metadata.
NFTs consist of two major components, the non-fungible token itself and the media file behind it. Since humans are visual beings, this file is usually what sets the NFT apart. It can be an image, a video, artwork and so on. For example, the metadata of Beeple’s famous “Everydays: the First 5000 Days” (sold for $69 million in 2021) is the artwork you can see below.
Non-fungible tokens can have their metadata stored either on-chain or off-chain, affecting the security, value, and longevity of the asset.
On-Chain Metadata
On-chain metadata refers to storing all the data related to an NFT directly on the blockchain. This includes information such as the artwork, ownership history, and transaction records. Keeping metadata on the blockchain guarantees that the data remains immutable and secure, increasing the value of the NFT.
For instance, an NFT with all its metadata stored on the blockchain is highly secure, as no third party can modify or remove the information. On the downside, storing metadata on-chain can be costly because every transaction or update requires gas fees. The more data stored, the higher the costs will be, making complex or large NFTs expensive.
The CryptoPunks NFT collection stores all relevant metadata directly on Ethereum. As a result, CryptoPunks are considered highly valuable and secure because they do not rely on external servers for their data.
Off-Chain NFTs
The vast majority of NFTs use off-chain storage for metadata. This means they store their metadata on external servers such as cloud storage or decentralized file systems like IPFS (InterPlanetary File System). While the NFT itself is minted on the blockchain, the actual data (such as an image or video) is stored off-chain.
Storing metadata off-chain significantly reduces the transaction costs associated with creating and trading NFTs. The tradeoff is that off-chain NFTs carry higher risks because the asset’s data can change. If the off-chain storage system fails or is compromised, the NFT’s value could plummet.
An example of an off-chain NFT is the Bored Ape Yacht Club. The ownership and sale records are kept on the Ethereum blockchain but the actual images are stored off-chain.
Closing Thoughts
On and off-chain transactions both have valuable functions in the dApp, NFT and DeFi ecosystem. Both approaches offer advantages that fit different use cases, be it security, transparency, and immutability, or simplicity, speed and lower costs. Nonetheless, understanding the implications of each type of transaction will help you to navigate the space more securely and with confidence.
