What Is Off-Chain?
Also known as: Offchain, Off-Chain Transaction
In short
Off-chain refers to transactions, data or computations that take place outside the blockchain and are not recorded on it. It offers scalability, cost and privacy advantages but often requires additional trust assumptions.
The most common example of off-chain transactions is centralized crypto exchanges. A trade between two users on an exchange is recorded not on the blockchain but in the exchange's own database; only deposits and withdrawals are reflected on-chain. This makes transactions fast and cheap but requires the user to trust the exchange.
There are also more decentralized off-chain solutions. In payment channels such as the Lightning Network, parties make many payments among themselves with signed messages and write only the opening and closing of the channel to the chain. Large data such as the image files of NFTs are also mostly kept in off-chain storage systems such as IPFS; on the chain, there are only links pointing to this data. Off-chain votes by DAOs that require no gas fees are also an application of the same concept.
Transactions taking place off-chain cannot directly benefit from the chain's security guarantees. For this reason, well-designed systems ensure that it is possible to return to the chain in the event of a dispute; for example, if the counterparty cheats in a payment channel, the user can reclaim their funds by submitting the latest valid state to the chain. It is important for users to know at what point an off-chain service requires trust in a third party.
Last updated: · This content is for information purposes only and is not investment advice.