Off-Chain

Off-chain describes activity connected to a blockchain that is carried out and agreed upon without every step being written to the ledger itself. Instead of broadcasting each transfer to miners or validators, participants follow a set of rules, often enforced by a smart contract or a signed cryptographic commitment, and only touch the main chain when the arrangement opens or closes.

The most common off-chain mechanism is the payment or state channel. Two or more parties lock funds into a contract on-chain, then exchange an unlimited number of signed balance updates privately between themselves. Only the opening deposit and the final result are ever recorded on the blockchain, so a fee is paid once instead of on every single transfer. Bitcoin's Lightning Network is the best known example, routing everyday payments across a mesh of channels for near instant, low cost settlement, while several Ethereum applications use comparable state channels for gaming, micropayments, and repeated transfers between the same parties.

Off-chain designs trade a degree of self custody for speed and lower cost: participants, or a delegated watchtower service, must stay able to monitor a channel so they can contest a counterparty who tries to close it using an outdated, more favorable balance. Sidechains and rollups also shift work away from the base layer but still publish more data back on-chain, which sets them apart from pure off-chain channels. Alongside on-chain settlement, off-chain techniques remain one of the main building blocks behind blockchain scaling.