On-chain vs. off-chain transactions
Every cryptocurrency transaction is recorded on a blockchain, but when exactly these transactions are recorded depends whether transactions happen on-chain or off-chain.
On-chain transactions happen directly on the blockchain and are verified there and then by miners, in the case of Bitcoin, for example. These on-chain transactions are simply called transactions.
Off-chain transactions are confirmed outside of the blockchain and are recorded onto the blockchain at a later stage. These transactions can be confirmed instantly and much cheaper than on-chain ones, as they don’t have to be confirmed immediately on the blockchain.
For example, if you send Bitcoin from your Luno wallet to another Luno wallet using the email or cell number function, this transaction will take place off-chain and is recorded on the Bitcoin blockchain at a later stage. But, if you send to a recipient with a wallet at another exchange, the transaction will take place on-chain, hence the higher transfer costs and longer confirmation times.
The Bitcoin community endorses off-chain solutions, such as the Lightning Network, as they relieve congestion on the Bitcoin blockchain, resulting in lower fees and quicker transaction confirmations. The Lightning Network and other Layer-2 protocols will continue to play a massive role in legitimising Bitcoin and other cryptocurrencies as a viable alternative to fiat money.