What Are On-Chain Transactions?
On-chain transactions are critical components of a blockchain's main network, ensuring security through validation and confirmation directly on the blockchain. They incur higher costs and slower speeds compared to off-chain transactions, which are validated on secondary layers. This article delves into what on-chain transactions entail, their pros and cons, and why they remain an integral part of many blockchain networks.
Key Takeaways
On-chain transactions are recorded and confirmed on a blockchain's main network, providing greater security but often at higher fees and slower speeds.
Off-chain transactions occur on second-layer networks, offering faster processing and lower fees, but they can be less secure due to additional vulnerabilities.
The decision between using on-chain or off-chain transactions depends on the user's priorities, such as preferring security or cost-efficiency.
Network congestion on popular blockchains can lead to significant delays and increased transaction fees.
Developers face a trilemma when trying to improve blockchain scalability, security, and decentralization, often sacrificing one to enhance another.
How On-Chain Transactions Work
On-chain transactions occur on a main blockchain. They have been validated, recorded, and agreed upon by the blockchain network. For example, on the Bitcoin blockchain, a user who transfers a bitcoin to another user with their wallet via the main Bitcoin blockchain has conducted an on-chain transaction. The transaction was sent to a mem pool, processed into a block, and broadcast to the network, which confirms the block.
A user who conducts a transaction using Arbitrum One, a second-layer solution for Ethereum, executes an off-chain transaction. This network processes transactions for the main blockchain, places them in batches called rollups, and sends them to the main chain for validation. Arbitrum One is much faster and cheaper because it bundles transactions for the Ethereum main blockchain.
Challenges and Costs of On-Chain Transactions
The most significant concerns about on-chain transactions are the time they take to be processed and their costs. On-chain transactions can take a long time to be confirmed if certain conditions are met, such as times when there are more transactions occurring. More transactions tend to cause network congestion on popular blockchains, which increases confirmation times and network fees.
In some cases, this congestion can cause users to wait hours for transaction confirmations. For example, on July 19, 2024, the average Bitcoin confirmation time was 1,366.4 minutes, or nearly 23 hours—three days earlier, it was 76.8 minutes, or a little more than one hour.1 That same day, average fees were $0.98, and there were 116,720 unconfirmed transactions waiting in the mem pool.2
On new blockchains with low transaction volume, on-chain transactions can be enough for most users and typically have low fees. As the user base grows, network congestion can occur, leading to slower transaction processing. The chain will still process as many transactions per second as before, but there will be more waiting than when there were fewer transactions. Most blockchains charge transaction fees, which tend to increase with higher demand.
Developers aim to fix congestion and fee issues, but face challenges with balancing scalability, decentralization, and security. Improving one factor often means sacrificing another. Some projects claim to solve this issue, but usually compromise on one aspect.
Off-chain transactions, while increasing processing speeds and decreasing fees, also decrease a blockchain's security because a bridge is needed to communicate with the main chain. This adds a weakness that can be, and has been, exploited by hackers.
Comparing On-Chain and Off-Chain Transactions: Which Is Better?
Whether on-chain or off-chain transactions are better depends on the blockchain and cryptocurrency being used and the user's personal preferences. If the goal is security, an on-chain transaction might be preferred, but if low transaction fees and faster speeds are important, an off-chain transaction might be better.
It also depends on the off-chain solution's programming and whether it is a target for hackers and thieves. Arbitrum, the second-layer and off-chain processing solution for Ethereum, has grown into more than just an off-chain processor for Ethereum—in early 2024, it underwent a series of hacks that cost users millions.
What Are On-Chain Payments?
An on-chain payment is a transaction that is facilitated by a main blockchain rather than a second-layer solution.
What Is the Meaning of On-Chain?
In blockchain and cryptocurrency, on-chain means an action that is recorded and verified only by the main chain. Off-chain means an action that is recorded and verified by another chain or application and sent to the main chain to be officially recorded.
What Does Enable On-Chain Transactions Mean?
You might encounter an option in a wallet to process a transaction on-chain or off-chain. "Enable On-Chain Transaction" would mean you would choose to have your transaction processed by the main blockchain. Depending on the cryptocurrency, this could mean higher fees and slower processing times compared to using an off-chain transaction.
The Bottom Line
On-chain transactions are recorded and validated directly on a blockchain's main network, offering higher security from tampering once confirmed. However, they tend to have slower processing times and higher fees, especially on popular blockchains experiencing network congestion.
In contrast, off-chain transactions are processed by second-layer networks, allowing for faster speeds and lower costs but at the potential expense of reduced security due to reliance on external bridges. Users must weigh their preferences for security, speed, and cost when choosing between on-chain and off-chain transactions.
