Off Chain

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  • Referring to data, transactions, etc. being stored or done on a second layer of the blockchain itself of the project. By puting this data on a 'sidechain' or elsewhere outside of the main blockchain.
  • Opposite would be On Chain
  • From a blog by Poloniex (21-10-2022):

"Off-chain transactions don’t necessarily require the blockchain network to execute transactions, and the data isn’t publicly available. Or else, some off-chain transactions only need the blockchain network for integration after the completion of transactions elsewhere. No matter what, off-chain transactions need to seek individual users’ approvals for handling, validating and authenticating all transactions by a third party, such as PayPal (PYPL). The off-chain approach can even be used to perform coupon-based transactions.

In this case, the parties involved must purchase the coupons in return for the cryptocurrency. Simply put, users possess a private key to gain access to their wallets, which keep the value of the cryptocurrency, but the transferring ownership over the wallet is to someone else. As there are no miners to queue up for validating transactions, so off-chain transactions can speed up the transactions and also lower the transaction fees.

The benefits:

  1. Efficiency: As the transactions are executed off the chains, so no miners queue up to validate and record each and every transaction to speed up the whole process and avoid any network congestion, making the transactions faster or even instantaneous to process.
  2. Low cost: Because of the absence of miners (for PoW) or validators (for PoS), off-chain transactions require little-to-no fees, which is extremely beneficial to handle large sums of cryptocurrency.
  3. Greater anonymity: The data won’t be publicly broadcasted to the network, hence off-chain transactions offer more privacy.

The drawbacks:

  1. Less transparency: Off-chain transactions do not follow the same protocol as their counterparts, so the parties involved can’t keep track of the changes on the chain and the transactions process solely depends on the third party, which opens up potential disputes in the future.
  2. Not permissionless: Similar to the above point. For off-chain transaction, users own a wallet key, but they don’t have the right of transferring the ownership of the wallet, nor having the right of validating and authenticating all the transactions on the chain, so everything depends on the third party or intermediary, who must have good credibility to avoid any disputes.
  3. Relatively less security: Since immutability is one of the key features of blockchain, if the transaction is executed onto an off-chain network, it indicates that the data is relatively easy to be altered and the network is more vulnerable to fraudulent activity compared with on-chain transactions."