Off-Chain

Off-Chain, as the name implies, refers to blockchain transactions that are processed outside the blockchain.

Due to the limitations of on-chain transactions, including a blockchain’s scalability, speed, and cost, off-chain transactions and Layer 2 protocols were introduced to help Layer 1 blockchains deal with congested networks and slow processing speeds.

They accomplish this by doing the processing work outside of the Layer 1 blockchain network, on a completely different network, with rapid and instantaneous processing, and none of the fees associated with on-chain transactions.

The Lightning Network and Liquid Network are two Layer 2 protocols built on top of Bitcoin that perform off-chain Bitcoin issuance and settlement.

Polygon (MATIC), Arbitrum, Loopring, Immutable X, and xDai Chain are the top 5 Ethereum Layer 2 solutions.

Related Terms

Ethereum (ETH)

Ethereum is a decentralized blockchain platform that makes digital money, global payments, and applications possible using open-source software and smart contract functionality. The big difference between the two is that Ethereum is programmable, meaning you can build and use decentralized apps on the network. That means the Ethereum blockchain can be programmed to do virtually anything.

Lightning Network

A decentralized layer 2 payment protocol layered on top of the Bitcoin network that makes bitcoin (BTC) better by transacting off-chain, or outside of the Bitcoin network. It can handle billions of transactions per second across its network. It can handle billions of transactions per second across its network, providing near-instant financial transactions between platforms and wallets using it together. The Lightning Network can also offer cross-chain atomic swaps, happening off-chain instantly.

Money Legos

Also called Money Legos, refers to the idea of composability, the combining of simple protocols that are already doing something very well on their own, into a brand new protocol or service. Lego blocks, or individual protocols operating on the same blockchain network, can “snap” onto another Lego block, or protocol, creating new and incredible DeFi projects. The protocols can interoperate, or work together using middleware, that binds the various protocols together.

Bitcoin (BTC)

Bitcoin (BTC) is most well known as a digital decentralized cryptocurrency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries, such as payment gateways or banks or routing services. Think of bitcoin as Internet money, that you can send and receive directly, to and from anyone, and you can use it to pay for stuff.

Polkadot (DOT)

Polkadot (DOT) is an open-source blockchain protocol for cryptocurrencies, dubbed the “blockchain of blockchains”, that allows different, incompatible networks to communicate with each other and share data, using a multichain design.