What is On-Chain? Understanding how it works on the blockchain

Have you ever wondered why transactions on the blockchain take time and cost fees? The answer lies in the concept of on-chain — a key element in the world of cryptocurrencies. Let’s explore what on-chain is and why it matters.

What is On-Chain?

On-chain refers to all activities and transactions processed directly on the blockchain — a decentralized, distributed ledger maintained by thousands of computers across the network. Each action is publicly recorded, permanent, and transparent, making it immutable and unchangeable.

The Three Fundamental Pillars of On-Chain

Direct Transactions: When you transfer cryptocurrency from one wallet to another, that transaction must be validated by the entire network. The system uses mechanisms like Proof of Work (PoW) or Proof of Stake (PoS) to ensure validity. Once confirmed, the transaction becomes immutable — no one can forge or alter it.

Smart Contracts: These are pre-coded programs on the blockchain that execute automatically without intermediaries. When conditions are met, the contract runs automatically. Since everything occurs on the blockchain, the entire process is transparent and tamper-proof.

Tokenization of Assets: Real estate, digital art, or any other assets can be converted into tokens on the blockchain. Ownership and transfer of these tokens are securely and publicly recorded on the system.

On-Chain vs Off-Chain: Pros and Cons

Transaction Speed: On-chain transactions are slower because they require validation from the entire network. Off-chain solutions process transactions outside the main blockchain, allowing for much faster transactions.

Operational Costs: On-chain transactions require paying network fees for validation computational costs. Off-chain reduces costs by alleviating load on the blockchain, resulting in lower transaction fees.

Security and Privacy: On-chain benefits from the inherent immutability of blockchain — data cannot be altered. Off-chain can implement different security models, depending on the design of each solution.

Why is Understanding On-Chain Important?

Having a clear understanding of on-chain helps you grasp why some transactions take time, why fees fluctuate, and why blockchain ensures high security. For businesses, this knowledge aids in choosing the right solution — whether to use on-chain for security or off-chain for speed.

In summary, on-chain is the foundation of transparency and security in blockchain. Knowing what on-chain is will help you make smarter decisions within the crypto ecosystem.