What Are On-Chain Transactions?

On-chain transactions refer to cryptocurrency transfers that take place directly on a blockchain's primary chain. In contrast, off-chain transactions are executed on secondary blockchains, networks, or applications, making them more vulnerable to external interference.

Despite their enhanced security, on-chain transactions tend to incur higher fees and experience slower processing times compared to off-chain transactions. This disparity has led many popular blockchains to explore methods for accommodating off-chain transactions.

Key Points to Remember:

- On-chain transactions are validated, recorded, and confirmed on the main blockchain.

- Off-chain transactions are conducted outside of the main blockchain network, often on a secondary layer.

- Once recorded, on-chain transactions are secure and cannot be altered.

- Popular blockchains like Bitcoin and Ethereum often face challenges with on-chain transaction speeds, as they can process fewer transactions simultaneously compared to off-chain methods.

Understanding On-Chain Transactions

On-chain transactions occur directly on the primary blockchain, where they are validated and agreed upon by the network. For example, when a user sends Bitcoin to another user through their wallet on the main Bitcoin blockchain, this constitutes an on-chain transaction. The transaction is transmitted to a memory pool, processed into a block, and then confirmed by the network.

Conversely, when a transaction is made using Arbitrum One, a second-layer solution for Ethereum, it is considered an off-chain transaction. This network processes transactions for the main blockchain, groups them into bundles called rollups, and then submits them to the main chain for validation. Arbitrum One offers faster and cheaper transactions by consolidating multiple transactions before sending them to the Ethereum main blockchain.

Concerns with On-Chain Transactions

The primary concerns surrounding on-chain transactions are their processing times and associated costs. During peak times with high transaction volumes, on-chain transactions can take significantly longer to confirm. Increased activity can lead to network congestion on popular blockchains, which raises confirmation times and fees.

In extreme cases, users might wait several hours for their transactions to be confirmed. For instance, on July 19, 2024, the average confirmation time for Bitcoin was 1,366.4 minutes (almost 23 hours), compared to just 76.8 minutes three days earlier. On that same day, average transaction fees reached $0.98, with 116,720 unconfirmed transactions in the memory pool.

On newer blockchains with lower transaction volumes, on-chain transactions may work well for most users, and fees tend to be low. However, as the user base expands, network congestion increases, leading to slower transaction processing times. While most blockchains maintain a consistent number of transactions per second, a higher volume of transactions results in longer wait times. Typically, networks impose fees for processing transactions, and these fees increase with demand.

Developers are actively seeking solutions to address congestion and fee-related issues across all blockchains. However, enhancing one aspect—such as scalability, decentralization, or security—often comes at the expense of another. Some blockchain projects claim to have resolved this challenge, but in practice, they usually compromise one factor for another.

While off-chain transactions can boost processing speeds and reduce fees, they also compromise blockchain security since a separate bridge is required to connect with the main chain, which can be exploited by hackers.

Which is Better: On-Chain or Off-Chain?

The preference for on-chain or off-chain transactions largely depends on the specific blockchain, cryptocurrency in use, and the user's individual needs. If security is the main concern, on-chain transactions may be preferable. However, if lower fees and faster speeds are prioritized, off-chain transactions might be the better choice.

It also depends on the security of the off-chain solution itself and its vulnerability to hacking. For example, Arbitrum, which serves as a second-layer and off-chain processing solution for Ethereum, faced a series of hacks in early 2024, resulting in significant losses for users.

What Are On-Chain Payments?

An on-chain payment is a transaction processed directly on a main blockchain rather than through a second-layer solution.

What Does On-Chain Mean?

In the context of blockchain and cryptocurrency, "on-chain" refers to actions recorded and verified solely by the main blockchain. "Off-chain" indicates actions that are recorded by another chain or application before being submitted to the main blockchain for official recording.

What Does It Mean to Enable On-Chain Transactions?

When using a wallet, you may see an option to process a transaction on-chain or off-chain. Selecting "Enable On-Chain Transaction" means you choose to have your transaction processed through the main blockchain, which may result in higher fees and slower processing times compared to off-chain transactions.

Conclusion

An on-chain transaction is any activity or transfer that is recorded and processed by a blockchain's primary network. In contrast, an off-chain transaction occurs when a secondary application handles the recording and processing before sending it to the main blockchain for official confirmation.

The opinions and analyses shared on Investopedia are for informational purposes only. Please review our warranty and liability disclaimer for more information. As of the writing of this article, the author does not own any cryptocurrency.