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Exchanges that are outside the Blockchain and can be completed via a variety of techniques like using a CEX
- In blockchain-based cryptocurrencies, off-chain transactions refer to those which occur outside of the blockchain itself.
- Off-chain transactions can work by using a CEX , swapping private keys to an existing wallet instead of transferring funds, or by using a third-party or coupon-based interlocutor.
- Off-chain transactions can entail lower fees, immediate settlement, and greater anonymity than on-chain transactions.
- Depending on the method used, off-chain transactions may eventually have to be recorded on-chain.
Off-Chain Transactions Advantages
- They can be executed instantly. On-chain transactions, on the other hand, can have a long lag time, depending upon the network load and number of transactions waiting in the queue to be confirmed.
- Off-chain transactions usually don't have a transaction fee, as nothing occurs on the blockchain. Since no miner or participant is required to validate the transaction, there is no fee, making it an attractive option, especially if large amounts are involved. On-chain transactions, meanwhile, may at times come at a high cost, which leads to problems of Bitcoin Dust, a situation where small amounts of bitcoins cannot be transacted due to high transaction fees.
- Off-chain transactions offer more security and anonymity to the participants because details are not publicly broadcast. In the case of on-chain transactions, it is possible to partially determine a participant’s identity by studying transaction patterns.