Crypto Terms: Letter O

What is Off-Chain Transaction?

Meaning:

Off-Chain Transaction - a transaction that occurs outside of the main blockchain.

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Let's find out Off-Chain Transaction meaning, definition in crypto, what is Off-Chain Transaction, and all other detailed facts.

An off-chain transaction occurs outside of the main blockchain. Off-chain transactions were developed as a solution to the issues related to on-chain transactions – financial operations that occur when cryptocurrency tokens are transferred within the native blockchain network.

Although cryptocurrencies like Ethereum (ETH), Solana (SOL), and Dogecoin (DOGE) offer unique functionalities and differ from each other, they are all based on the core principles of decentralization that Bitcoin (BTC) was developed with.

A decentralized blockchain network allows users to conduct financial transactions using network nodes that verify the transactions inside the distributed ledger. Cryptocurrency can be transferred via the network anywhere in the world, regardless of the locations of the sender and receiver.

Off-chain transactions were created to solve some of the issues that blockchain transactions encounter. They serve as a second-layer solution that moves the transaction outside the main blockchain. Second-layer protocols make the transaction process cheaper and faster.

The second layer encompasses projects and protocols built on top of the base blockchain. These projects are designed to improve the overall blockchain technology and user experience. Their goal is to expand blockchain functionality beyond its initial build.

Off-chain transactions are frequently used for debt agreements. Both parties must have mutual confidence that they owe each other a predetermined amount of cryptocurrency, making the transaction legitimate.

The transaction stays completely outside of the main blockchain network and occurs instantaneously. Users can then repay the remaining debt using a single on-chain transaction. They can create a channel for private key exchange for the wallets involved in the off-chain transaction.

As long as the channel remains open, users can swap cryptocurrency until a settlement is reached. The parties involved in the operation can then stop the channel and perform an on-chain operation to record the final transaction value.

Some of the best-known off-chain protocols are the Lightning Network and Liquid Network.

There are numerous advantages to performing an off-chain transaction, including:

Off-chain transactions help resolve the scalability issues of blockchain technology;
The transactions are executed significantly faster than on-chain which requires more time to be confirmed due to network congestion;
Until the transaction is added to the blockchain, the parties may not be required to pay any fees;
Parties conducting an off-chain transaction can remain anonymous as the transaction data is not recorded on the main blockchain and, therefore, isn’t publicly available.

blockchain or other <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-distributed-ledger/">distributed ledgers<\/strong><\/a> are referred to as off-ledger currencies. Even though an off-ledger currency is not designed particularly to be used with a blockchain, it can be utilized on one due to its functionality and widespread acceptability.<\/p>\nDifferent from an <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-on-ledger-currency/">on-ledger currency<\/strong><\/a>, an off-ledger currency doesn’t require<\/strong> continuous computational power to exist<\/strong>. Because of their stability and popularity, certain off-ledger currencies are digital <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-fiat/">fiat equivalents (such as USD or EUR) that are used on blockchains.<\/p>\nIn addition, since their value is still derived from off-ledger currencies, fiat-based<\/strong> <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoins (tokens tied to the value of nation-state currencies) might also fall within the concept of off-ledger currencies.<\/p>\nWondering where can you store off-ledger currencies<\/strong>? Well, talking about fiat-based stablecoins, you can either store them on a hardware crypto wallet like <a href=https://www.bitdegree.org/"//crypto//goon//ledger-nano-x/" target=\"_blank\" rel=\"nofollow noindex noopener\">Ledger Nano X<\/strong><\/a> or a software crypto wallet like the <a href=https://www.bitdegree.org/"//crypto//goon//binance/" target=\"_blank\" rel=\"nofollow noindex noopener\">built-in Binance wallet<\/strong><\/a>.<\/p>\nFiat money is a great illustration of an off-ledger currency<\/strong> since it is produced by central banks outside of blockchain networks. The United States dollar (USD) is a prominent example of an off-ledger currency because of its value and worldwide popularity. It is often held as a reserve currency by most financial organizations. In contrast to on-ledger currencies, it is centrally regulated and issued without restrictions.<\/p>\nIn regards to that, off-ledger currencies lack<\/strong> <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-intrinsic-value/">intrinsic value<\/strong><\/a>. Instead, their worth is determined by the government's support and subsequent designation as legal tender. The ability of central banks to issue and control fiat money gives them complete control over the economy. Unfortunately, bad actors can still counterfeit them. And, if their issuance is unregulated, they can have negative economic consequences.<\/p>","definition":"a type of digital currency that is minted outside of a blockchain ledger yet is still accepted and used.","status":"published","meta_title":"What is Off-Ledger Currency? Definition & Meaning | Crypto Wiki","meta_description":"Off-Ledger Currency meaning: Off-Ledger Currency - a type of digital currency that is minted outside of a blockchain ledger yet is still accepted and used.","meta_keywords":null}" :prev-section="{"id":554,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Governance","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2023-12-10T11:02:19.000000Z","slug":"what-is-off-chain-governance","title":"What is Off-Chain Governance?","section":"O","keyword":"Off-Chain Governance","content":"When an Off-Chain Governance<\/strong> is established, <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-public-blockchain/">public blockchain<\/strong><\/a> stakeholders challenge one another for control by trying to persuade the majority to join and promote their cause. Thus it has similarities with how politics work in real life. Stakeholders promote their interests via collaboration platforms like social media and forums, or during events, conferences, and other gatherings.<\/p>\nOff-chain governance network tries to consider everyone’s interests, but the power of decision-making mostly fluctuates between the core development team members and miners.<\/p>\nThe most popular blockchain platforms like <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-bitcoin-btc/">Bitcoin or <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ethereum use their own off-chain governance variation. For example, Bitcoin users don’t receive any inherent voting rights just by owning BTC since Bitcoin hasn’t introduced an on-chain governance network or governance tokens. The possession of BTC can only do so much, such as make your voice heard in off-chain conversations.<\/p>\nMoreover, it doesn’t matter how many blocks a Bitcoin miner has verified, that mining power does not translate to governance power. It’s important to note that no matter what hash rate percentage you reach when mining, you won’t be rewarded with governance rights. Your responsibility for verifying and adding transactions to the blockchain always stays the same just like the type of rewards you receive.<\/p>\nBefore any major changes are implemented within Bitcoin or Ethereum, the proposal is discussed by the crucial members of the platform. They include the members of the core development team, miners, researchers, and end-users. In addition, Bitcoin allows anyone to attend its core development team’s online meetings.<\/p>\nEthereum also governs its platform in a similar fashion as Bitcoin. <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//who-is-vitalik-buterin/">Vitalik Buterin<\/strong><\/strong><\/a> who is often considered the crypto hero is in charge of the core development team of Ethereum. <\/p>\nThe process of making important decisions off-chain starts much as it does <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-on-chain/">on-chain.  The core development team brings forward a formal proposal for implementing new code like <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-bitcoin-improvement-proposal-bip/">Bitcoin improvement proposal (BIP)<\/strong><\/a> or <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-ethereum-improvement-proposal-eip/">Ethereum improvement proposal (EIP)<\/strong><\/a> which basically are improvement suggestions. In the latter cases, they’re held in the project’s official repository on Microsoft or GitHub.<\/p>\nThen stakeholders come together to discuss the proposal and express their approval or disapproval of it. It’s much like <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-game-theory/">game theory<\/strong><\/a>. <\/p>\nNode operators, also known as <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-validator/">validators, and <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-miner/">miners are consulted to find out whether they approve of upgrading the software. If everyone approves, then the code is implemented without a hassle. Although it almost never goes that smoothly. <\/p>\nEach major update is announced in advance in order to keep the developers and stakeholders on the same page.<\/p>\nNow, in case of disagreement between stakeholders, there are two possible courses of action:<\/p>\n<ul>\n<li>Try to change the opinion of stakeholders by using persuasion techniques to bring the other stakeholders around;<\/li>\n<li>Don’t try to change the stakeholders' opinions. Instead, enforce the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-hard-fork-blockchain/">hard fork<\/strong><\/a> protocol. This way they’re able to make relevant and agreed-upon changes.<\/li>\n<\/ul>","definition":"is a blockchain governance model that allows every stakeholder to have a say in public blockchains' decision-making via collaboration.","status":"published","meta_title":"What is Off-Chain Governance? Definition & Meaning | Crypto Wiki","meta_description":"Off-Chain Governance meaning: Off-Chain Governance - is a blockchain governance model that allows every stakeholder to have a say in public blockchains' decision-making via collaboration.","meta_keywords":null}" :model="{"id":560,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Financial_transaction","level":"medium","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2023-12-10T11:05:32.000000Z","slug":"what-is-off-chain-transaction","title":"What is Off-Chain Transaction?","section":"O","keyword":"Off-Chain Transaction","content":"An off-chain transaction<\/strong> occurs outside of the main <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-blockchain/">blockchain. Off-chain transactions were developed as a solution to the issues related to on-chain transactions – financial operations that occur when cryptocurrency tokens are transferred within the native blockchain network.<\/p>\nAlthough cryptocurrencies like <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ethereum (ETH)<\/strong><\/a>, Solana (SOL), and Dogecoin (DOGE)<\/strong> offer unique functionalities and differ from each other, they are all based on the core principles of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralization/">decentralization that <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-bitcoin-btc/">Bitcoin (BTC)<\/strong><\/a> was developed with.<\/p>\nA decentralized blockchain network allows users to conduct financial transactions using <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-node/">network nodes<\/strong><\/a> that verify the transactions inside the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-distributed-ledger/">distributed ledger<\/strong><\/strong><\/a>. Cryptocurrency can be transferred via the network anywhere in the world, regardless of the locations of the sender and receiver.<\/p>\nOff-chain transactions were created to solve some of the issues that blockchain transactions encounter. They serve as a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-second-layer-solutions/">second-layer solution<\/strong><\/a> that moves the transaction outside the main blockchain. Second-layer protocols make the transaction process cheaper and faster.<\/p>\nThe second layer encompasses projects and protocols<\/strong> built on top of the base blockchain. These projects are designed to improve the overall blockchain technology and user experience. Their goal is to expand blockchain functionality beyond its initial build.<\/p>\nOff-chain transactions are frequently used for debt agreements. Both parties must have mutual confidence<\/strong> that they owe each other a predetermined amount of cryptocurrency, making the transaction legitimate.<\/p>\nThe transaction stays completely outside of the main blockchain network and occurs instantaneously. Users can then repay the remaining debt using a single on-chain transaction. They can create a channel for <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-private-key-secret-key/">private key<\/strong><\/a> exchange for the wallets involved in the off-chain transaction.<\/p>\nAs long as the channel remains open<\/strong>, users can swap cryptocurrency until a settlement is reached. The parties involved in the operation can then stop the channel and perform an on-chain operation to record the final transaction value.<\/p>\nSome of the best-known off-chain protocols are the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-lightning-network/">Lightning Network<\/strong><\/a> and Liquid Network<\/strong>.<\/p>\nThere are numerous advantages to performing an off-chain transaction, including:<\/p>\n<ul>\n<li>Off-chain transactions help resolve the scalability issues of blockchain technology;<\/li>\n<li>The transactions are executed significantly faster<\/strong> than on-chain which requires more time to be confirmed due to network congestion;<\/li>\n<li>Until the transaction is added to the blockchain, the parties may not be required to pay any fees;<\/li>\n<li>Parties conducting an off-chain transaction can remain anonymous as the transaction data is not recorded on the main blockchain and, therefore, isn’t publicly available.<\/li>\n<\/ul>","definition":"a transaction that occurs outside of the main blockchain.","status":"published","meta_title":"What is Off-Chain Transaction? Definition & Meaning | Crypto Wiki","meta_description":"Off-Chain Transaction meaning: Off-Chain Transaction - a transaction that occurs outside of the main blockchain.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"Having completed a Master’s degree on Economics, Politics & Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US’ Western and Japan’s Collective forms of capitalism, 1945-2020.<\/p>\nWith close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\nAaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\nAaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? 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Standards","status":"published","modified_content":null},{"chapter_id":3,"order":5,"slug":"how-to-buy-crypto","title":"From Fiat to Crypto: How to Buy Crypto for the First Time","status":"published","modified_content":null},{"chapter_id":3,"order":6,"slug":"fiat-to-crypto","title":"Taking Profits: Turning Crypto Into Fiat","status":"published","modified_content":null},{"chapter_id":3,"order":7,"slug":"how-to-use-crypto","title":"You\u2019ve Got Crypto: What Can You Do With It?","status":"published","modified_content":null}]},{"id":4,"title":"Crypto Wallets","slug":"crypto-wallets","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-wallets.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-wallets-101.jpg","rating":80,"sections":[{"chapter_id":4,"order":1,"slug":"what-is-a-crypto-wallet","title":"What is a Crypto Wallet?","status":"published","modified_content":null},{"chapter_id":4,"order":2,"slug":"hot-wallet-vs-cold-wallet","title":"Hot Wallet VS Cold Wallet: Which One to Pick?","status":"published","modified_content":null},{"chapter_id":4,"order":3,"slug":"non-custodial-wallet","title":"What are Non-Custodial Crypto Wallets?","status":"published","modified_content":null},{"chapter_id":4,"order":4,"slug":"what-is-metamask","title":"Metamask: The Leading Non-Custodial Wallet","status":"published","modified_content":null},{"chapter_id":4,"order":37,"slug":"how-safe-is-cryptocurrency","title":"The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?","status":"published","modified_content":null}]},{"id":5,"title":"NFTs","slug":"nfts","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-nfts.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/nfts-101.jpg","rating":100,"sections":[{"chapter_id":5,"order":2,"slug":"how-to-trade-nfts","title":"NFT Trading: The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens (NFTs)?","status":"published","modified_content":null},{"chapter_id":6,"order":1,"slug":"what-is-defi","title":"What is Decentralized Finance (DeFi)?","status":"published","modified_content":null},{"chapter_id":6,"order":2,"slug":"what-is-defi-2-0","title":"DeFi 2.0: The New Version of Decentralized Finance","status":"published","modified_content":null},{"chapter_id":6,"order":3,"slug":"what-are-dapps-in-crypto","title":"What Are dApps and How Do They Work?","status":"published","modified_content":null},{"chapter_id":6,"order":4,"slug":"defi-dapps","title":"Picking the Right dApps: Dos and Don'ts","status":"published","modified_content":null},{"chapter_id":6,"order":5,"slug":"what-is-web-3-0","title":"Web 3.0: The Future of the Internet","status":"published","modified_content":null},{"chapter_id":6,"order":6,"slug":"what-are-smart-contracts","title":"What is the Core Purpose of Smart 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