How to Make Bitcoin Transactions Without Using Blockchain (Off-chain)

This is a reupload of an article I wrote quite a while ago.

When people hear “cryptocurrency,” many probably think of blockchain. I recently researched transactions that don’t use blockchain, so I’ll summarize what I learned.

What is Blockchain

In simple real-world terms, blockchain is like…

Something like this.

First, Person A makes a transaction with Person B.

Since the transaction was done correctly, it needs to be recorded.

The record is very important and would be disastrous if stolen. So, the transaction record is stored in multiple safes among many that exist worldwide.

The safes are made of reinforced glass, so everyone can see inside.

This makes it difficult to tamper with transaction records. All’s well that ends well.

…This way of using blockchain is called “on-chain.”

What? If there’s “on,” is there also “off?”

Don’t worry. There certainly is.

What is Off-chain

Now for the main topic. What is off-chain?

Off-chain is a way of making transactions without using blockchain as explained earlier.

Records are stored in an internal database. This alone makes it significantly inferior in terms of security. However, since it doesn’t need to save to the blockchain every time, transaction speeds are much faster. What used to take 10-20 minutes can be done in seconds.

Since it’s still dangerous without any protection, encryption technology is incorporated. A payment channel is created where Person A, B, and C are present. Everyone has a key, and transactions can’t be completed without all three people. When this payment channel starts, if Person A has 10,000 yen and Person B has 10,000 yen, when a transaction is completed, the internal distribution ratio changes. For example, Person A: 0 yen, Person B: 20,000 yen. By uploading this final distribution ratio to the blockchain, fees are minimal and transfers are quick.

Off-chain Application Example 1

Exchanges perform countless transactions per second. Since cryptocurrency values fluctuate quickly, it’s safer to complete transactions as fast as possible. Also, since data uploaded to blockchain is difficult to delete, if personal information is accidentally uploaded, it’s irreversible. Therefore, cryptocurrency exchanges apparently decided to only upload final results to the blockchain.

Off-chain Application Example 2

I’ve been using something called a Lightning wallet recently, which also uses off-chain. You might think it’s just called “Lightning,” but it should be considered completely different. While wallets record every transaction, this only records the final result. This is more convenient for sending small amounts.

The benefits of off-chain transactions are lower fees and faster transfers.

On-chain requires paying miners who create the blockchain blocks where transactions are stored. That’s why fees are charged.

However, being just off-chain would risk tampering, so encryption technology is used to maintain security.