On-chain refers to anything that happens on a blockchain, as opposed to off-chain (i.e., not on the blockchain).
When using the term on-chain, people most often refer to on-chain transactions.
Key Differences Between On-Chain and Off-Chain Transactions
There are many differences between on-chain vs. off-chain transactions.
On-chain transactions rely on a blockchain’s internal mechanics to execute. Meanwhile, you can conduct Off-chain transactions via conventional methods (e.g., bank transfer, physical handoff, etc.)
Blockchains vary in their transaction performance, speed, reliability, and security because they are built for various purposes.
Some blockchains (e.g., Solana) are designed for speed. Transactions on these chains take seconds and cost very little in gas fees. Others, such as Bitcoin, are more suitable for traders and investors who are willing to wait a few minutes for added security.
Others, like Ethereum, continue to serve as all-purpose platforms for hosting decentralized applications (dApps) while maintaining superior security and influencing transaction costs.
On-Chain Transaction Costs
As mentioned, the cost of on-chain transactions can vary depending on the blockchain on which they are made. Transaction fees can also change depending on the time of day and network load. Network load refers to the amount of transactions the network needs to process at any given time.
For Example on Ethereum, during peak hours, gas fees can grow to twice, even three times what they are during calmer periods. Gas price jumps are most common in the latter half of the day in UTC time.
Fees on Ethereum have reached hundreds of dollars per transaction during particularly active periods. At the time of writing, the network operates with an average gas fee of $20 to $30 per transaction.
Networks like Solana facilitate transactions for a fraction of a cent and Avalanche for a few cents. Even with improvements, some consider blockchain gas fees high compared to off-chain alternatives.
Off-chain transactions don’t suffer the same issues, as the infrastructure they use is centralized, making it far simpler and cheaper to operate.
It’s worth noting that using “Layer 2” scaling solutions like Arbitrum or BASE has led to major strides in improving transaction fees on blockchains like Ethereum.
Conclusion
Transacting on-chain has clear decentralization, security, and privacy benefits compared to off-chain trade however, for some, the price is just too high. Luckily, most blockchains continuously work to improve their situation and alternative technologies such as Layer-2s are emerging to provide scaling solutions.
