What is an off-chain transaction?

An off-chain transaction takes place outside of the blockchain, and is often defined as a second-layer protocol. Second layer protocols are built on top of a base blockchain to improve on some of the problems that occur with on-chain transactions.

To better understand this, let’s use Bitcoin as an example. 

Bitcoin faces a scalability problem as more and more people start making use of its network. This can cause network congestion as well as higher transaction fees. 

Yet, there are protocols that take place outside its blockchain to make transactions quicker, easier, and cheaper, like the Lightning Network. This second-layer protocol is a decentralised, peer-to-peer network that allows users to transfer Bitcoin off-chain in an instant, with virtually no transaction fees. 

It is important to remember that transactions that take place off-chain are still safe. Trusted second-layer protocols like the Lightning Network actually improve network efficiency and security, and make transactions significantly cheaper.