Offchain

This is in contrast to onchain activity, which comprises all of the transactions and interactions taking place directly on the blockchain itself. These two types of activity serve different purposes within a blockchain ecosystem: during periods of high congestion, when transaction fees on a blockchain rise, offchain processing can relieve some of this stress by offloading certain processes from the main network. This results in lower costs and greater scalability.

One major example is the bitcoin Lightning Network, which allows users to conduct payments without having to record every single transaction on the bitcoin network itself. Only the opening and closing transactions need to be recorded onchain, making payments faster and cheaper.

Centralized crypto exchanges also run transactions offchain. When users exchange assets on these platforms, their balances are recorded on their own internal systems rather than any blockchain itself. These platforms operate onchain to process deposits and withdrawals, but once assets have been deposited into their holding wallets, any further user activity typically takes place offchain.

From an institutional investment perspective, offchain processing can be attractive for several reasons. One is data privacy — recording every balance and transaction on a traditional blockchain leaves them open for anyone to view, whereas centralized, offchain records require permissioned access.

On the other hand, offchain activity does not always offer the same transparency, decentralization or security as transactions recorded directly onchain.