The Role of On-Chain Transactions in the World of Cryptocurrencies

By Ronak Shah
4 Min Read

What Are on-chain transactions?

On-chain transactions are cryptocurrency deals that occur on the blockchain and are dependent on the state of the blockchain for their validity. On-chain transactions are valid only if the blockchain has been streamlined to reflect the deals on the public ledger. In addition, on-chain transactions offer security and transparency since they can’t be altered once they are recorded on the network.

Understanding on-chain transactions

On-chain transactions are transactions that occur on a blockchain that are reflected on the distributed, public ledger. They are validated or authenticated, leading to an update to the blockchain network.

Deals that occur on a blockchain must be validated by a variety of the network’s contributors, who are called miners. A sale is valid once the participants collaborate on the trade and an agreement is reached about its validity. The sale details are also recorded on the block and distributed to the network’s participants. 

Depending upon the network protocol, once a sale garners sufficient approval from network participants supporting the network’s agreement medium, it becomes nearly unrecoverable. Generally, it can only be reversed if the bulk of the blockchain’s mining power comes to an agreement to change the sale. 

Timing of on-chain transactions

On-chain transactions happen in real time in order to keep blockchain deals secure, empirical, transparent, and immediate. On-chain transactions can take an extended time to accumulate sufficient verifications and authentications from network participants before attesting a sale. Also, the miners need to validate the deals by using computers to solve complicated calculation problems each time a block is added to the blockchain.

Suppose the sale volume is high or there is traffic within the network. In that case, it takes longer for the miners to validate all of the deals. As a result, the contrary parties involved in the deals must stay for a resolution. Still, participants may have the choice to pay a fee so that it can be validated sooner. 

During the initial phase of a blockchain, when the sale volumes are low, on-chain deals may offer instant agreements. New network protocols and cryptocurrencies that give instant agreements are now making their way into the mainstream. 

Cost of on-chain transactions

On-chain transactions also come at a price, as miners command a fee for offering validation and authentication services to confirm a transaction on the blockchain within the shortest possible time. This fee is often high, depending upon the network’s expanding potential and transaction volume. For example, high fees have led to the matter of Bitcoin Dust, where fractional amounts of bitcoins couldn’t be transacted. However, for blockchain networks that are in their early stages of growth, their fees might be minimal or zero when the transaction volume is low.

How are on-chain transactions different from off-chain?

Off-chain transactions are conducted outside of the blockchain network. Off-chain transactions are frequently done by individuals who have an agreement that a third party guarantees the sale or verifies that it’s valid or complete.

Whether an on-chain or off-chain transaction is best is determined by the participants involved and what they ask foremost. An on-chain transaction is likely best if the thing is security, invariability, and a validated deal. Still, if low transaction volume and speed are essential, an off-chain sale could be better.