O for Off-Chain

Fourteenth edition of Web3 Alphabet

Off-Chain transactions are the ones performed outside of the blockchain network to save time and money.

Think of it, like your smart colleague who gets his leaves approved by the CEO instead of raising a leave request on the company portal and waiting for multiple authorities to sign it. The smart chap will still have to raise requests but it will probably take lesser time.

As we know, blockchain is a web of multiple computers (or people) and to get anything done on a blockchain requires everyone’s approval. So, in order to reduce the waiting time and gas fees (the cost we pay for doing a transaction on the blockchain).

Off-Chain transactions pass some of the validation and authorisation tasks from the blockchain to a third party. Now, this third party is not exactly a higher authority like a CEO but it is a trusted party.

Off-chain transaction methods

One way to do such an off-chain transaction is to use a layer 2 solution. These solutions are built on top of the main blockchain and they take some of the transaction load to another chain. We spoke about layer 2 in the 11th edition, linked here.

Other ways to do this include a transfer agreement between two parties involved in the transaction, and bringing in a trusted third party like PayPal, among others.

Risks Involved

Besides speeding up the transactions and making them cheaper, off-chain also gives more anonymity because your data is not being broadcasted to the whole network. However, these benefits come with a catch.

The off-chain transactions are not as transparent as the transactions happening on-chain (or on the blockchain). Further, off-chain is more vulnerable to fraudulent activity.

That’s all from O for Off-Chain. If you recall any other Web3 terms starting from the letter O, please leave a comment and I will include them in later editions.