What Are On-Chain Transactions?

Blockchain is the underlying technology powering Bitcoin transactions. With the help of this technology, users can send and receive Bitcoins without the need for any trusted third party like a bank.

Bitcoin supports both on-chain and off-chain transactions. While on-chain transactions offer greater security and transparency, they are usually more expensive and can take up to a couple of days to confirm a Bitcoin payment.

Let’s understand more about on-chain transactions, how they work, and explore their benefits. Here we go!

What Are On-Chain Transactions?

As the name suggests, on-chain transactions are the transactions that occur on the main Blockchain of any particular cryptocurrency. These transactions are considered genuine only when the main blockchain has been refreshed to include the newer transactions in the public ledger.

On-chain transactions offer maximum security and transparency as they can’t be altered once they are recorded on the network. However, they incur higher fees and have a slower processing time than off-chain transactions.

Any transaction that occurs on a blockchain must be verified by miners. A transaction is only considered valid once a consensus is reached about its authenticity. The transaction details are added to the blockchain upon successful verification and distributed to other network participants. The more confirmations a transaction receives, the harder it gets to reverse it.

Did you know?💡

Cryptocurrencies have different consensus mechanisms to verify transactions and add new blocks to a blockchain. For instance, Bitcoin uses a proof-of-work consensus mechanism, a method where miners compete against each other using high-performing computers to solve an extremely complex mathematical puzzle to guess the “hash” and win the block reward.

Learn more: What is Proof-of-Work in Blockchain?

Benefits of On-chain transactions

On-chain transactions have several advantages over off-chain payments. Let’s look at top three benefits of on-chain transactions:

Security: All the data stored on the main blockchain is end-to-end encrypted. This means it can never be altered once recorded.
Decentralization: No one can govern or control a blockchain or moderate its transactions. This means virtually there is no risk of any intermediaries breaching your trust or manipulating data.
Transparency: The blockchain technology makes financial transactions trustless and transparent. All the transactions are recorded on a publicly distributed ledger, and every transaction can be traced back to its origin via Blockchain Explorer. This allows users to backtrack any transaction and view its activity.

On-chain transactions timeline

Ideally, on-chain transactions are supposed to settle in real-time to ensure blockchain transactions are secure, efficient, and transparent. However, they rarely settle almost instantly. On-chain transactions can take a long time to gather enough authentications from other network participants before confirming a transaction.

Moreover, when a lot of transactions are pending in the mempool, it will take considerable time for miners to validate them, especially when there are a limited number of miners. The average network fee may spike during heavy network congestion as miners usually prioritize transactions with higher fees.

Thus, on-chain transactions may have a faster settlement cycle when the transaction volume is low. However, during periods when the network is congested, users may have to wait longer and pay higher network fees to include their transactions in the Blockchain. So, how much can on-chain transactions cost you? Let’s find out.

Cost of On-chain transactions

The cost of on-chain transactions is directly proportional to the number of pending transactions in the mempool. If the network is highly congested, on-chain transactions will be expensive. And when there is very little activity on the network, the cost of on-chain transactions will be minimal.

In December 2023, Bitcoin’s network fee spiked to $38, a level that was last seen in April 2021. The spike was due to a sudden increase in network activity. It is speculated that this was primarily due to Bitcoin Ordinals. For the most part, though, the average on-chain transaction fee has ranged between $1 to $5 in the last three years.

Final words

While on-chain transactions are the safest means to transfer crypto, they are not the cheapest. To circumvent this, developers of popular cryptocurrencies like Bitcoin, created the Lightning Network — a second layer on top of the main blockchain that facilitates instant transactions at a lower cost.

The Lightning Network transactions cost significantly less than on-chain payments. Such transactions are popularly known as “off-chain transactions”. That’s primarily because they don’t occur on Bitcoin’s main Blockchain.

It is always recommended to transact via the Lightning Network, primarily because such transactions cost less and are significantly faster.

Speed Bitcoin Lightning Wallet supports both on-chain and off-chain transactions. Moreover, there are no Speed fees associated with either payment mode. Speed Wallet is available for both Android and iOS users worldwide. Setting up Speed Wallet is easy, too. All you need is a valid email address to get started.

Download Speed Bitcoin Lightning Wallet today and experience lightning-fast Bitcoin transactions at your fingertips.