Home Did you know ? Off-chain and On-chain cryptocurrency transactions

Off-chain and On-chain cryptocurrency transactions

by Mic Johnson

There’s more to the cryptocurrency community than buying and selling cryptos. While most investors just want to buy and sell and make more money, the objective crypto analysts and enthusiasts study the crypto world’s deeper concepts. Taking the cardano network for an example, there have been latest developments regarding its latest Alonzo upgrade. Recall that this upgrade saw the beginning of smart contracts on the cardano network. However, in his tweet, Charles had recently said that he’d prefer the process referred to as “programmable validator” instead of the famous “smart contracts.’ He believes smart contracts do not fully capture the complete upgrade and its capability. However, if you want more than just buy cardano, it is essential that you understand what made smart contract not the exact concept to explain the network upgrade. So, here’s a brief explanation of what a smart contract is all about.

Smart Contracts:

One essential piece of information you should know is that smart contracts in Plutus codes could be divided into on-chain and off-chain. These codes are primarily for execution, and as the names imply, off-chain execution doesn’t occur on the blockchain but either on PC, smartphones, or other electronic devices. On the other hand, on-chain codes are executed on machine and core nodes, which keeps the blockchain running smoothly.

Off-chain crypto transactions:

As explained above, there’s the need to understand how these processes work to fully understand the concept of smart contracts. So, off-chain transactions are those crypto transactions that happen outside the blockchain. Most of these transactions cost little or no transactional fees, and because of this, they are starting to gain popularity even amongst large investors. The importance of off-chain transactions cannot be fully grasped until a comparison between them, and on-chain transactions have been concluded.

Contrary to the concept of on-chain transactions, the off-chain transaction takes the transaction and the values outside the blockchain and executes these processes using different methods. Some of them include the following;

  • Transfer agreement between both parties
  • A third party (guarantor) who honors the transaction agreement
  • Purchase of coupons in exchange for tokens. However, these codes are given to the third party who redeems them.

In a much straightforward way, both parties (sender and recipient) could exchange their private keys with some amount of crypto coin. This way, the coin stays in the wallet but with a new off-chain owner.

Note also that off-chain transaction is used to build, submit and query transaction submitted to the blockchain. So, for example, if you want to participate in an online sale on the cardano blockchain, you’d need to buy cardano and then make a bid. However, to make a bid, you’d need to send specific information to the smart contract (for example, the auction ID and the corresponding amount of ADA). The off-chain codes help build off-chain transactions and build the transactions to keep away ridiculous fees and extra charges. It also calculates the transaction fees and submits the transactions to the blockchain.

On-chain crypto transactions:

They are just regarded as transactions, and these transactions are considered valid when the transaction reflects on the public ledger. The whole on-chain transaction process requires the transaction to be authenticated and validated by some no of trusted participants, broadcasting every necessary information to the entire blockchain and recoding every transaction on the block. Hence, the whole process is entirely irreversible. However, the only time when an on-chain transaction could be reversed is when the bulk of the blockchain’s hashing power arrives at an agreement. Recall that all the steps on on-chain transactions are linked; hence, the status of the blockchain is modified to reflect the validity and occurrence of the transaction.

With on-chain transactions, fees are paid to keep the codes running and prevent DoS of the network. The reason for this is because if there are no fees, submission of transactions could become an endless loop, and this would congest the blockchain since nobody would be willing to validate the transactions. If this becomes the case at any point, the congestion will cause blockchain to seize functioning.

These processes (on-chain and off-chain transactions) have their unique features, and they both work hand-in-hand to build up the smart contract. However, note that on-chain codes are more of the basics on which off-chain and other codes could rest. The information represented in the on-chain codes are such that they need to be carefully analyzed and consistently fueled (fee is an important driver) in other to keep the blockchain running.

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