Every day each of us regularly carries out financial operations and as a rule, we make a series of recurring transactions with the same people. All these transactions should be added to the blockchain, which over time (if nothing is done) will choke on their number. But is there a way to reduce the number of recurring transactions added to the blockchain, taking into account the fact that the main transaction amount is fulfilled among the same people? Cryptocurrencies have a small workaround called “off-chain.” It was legalized and is being actively promoted to the masses.
What is Off-Chain?
Recent innovative ideas and projects, such as micropayment channels and the Lightning Network, create mutual trust-free financial channels among people so that they can interact with each other without using the blockchain. This can not only save time and disk space but also solve the problem of Bitcoin block size limit.
Off-chain is a transaction that takes place outside the blockchain. In practice, they are nevertheless connected, but it will only transfer the latest ones through the blockchain — like opening and closing a channel in the case of the Lightning Network. The main activity passes by Bitcoin or another cryptocurrency, into which off-chain also managed to penetrate.
What looks like sending a fractional part of one token can hide weeks of mutual settlements for many millions. These calculations are carried out according to the internal rules of the off-chain network, which has completely centralized management, and where the rules of openness and anonymity of the classic cryptocurrency can work.
Off-chain was created by crypto enthusiasts who began to use their own protocols that carry the transfer of tokens to blocks. You can exchange bitcoins daily in a classical way and pay for each transaction, as well as using the off-chain solution. The essence of off-chain is to group payments for several days so that tx fees are only for one, final transaction.
Closer to 2015, Bitcoin became really slow and overloaded, and the size of its blocks approached exhaustion. So Bitcoin Core has implemented LN support (the Lightning Network) in the Segwit update, which was activated in August 2017.
Bitcoin is not the only cryptocurrency with an activated off-chain. By this time, dozens of altcoins have already accepted it, including such large ones as Litecoin, and some, like Dash, have their own similar protocols.
Who Supports Off-Chain?
There is another bonus of off-chain technology — currency exchange. It came to Bitcoin along with the Lightning Network, and it is really called an atomic cross-currency swap. Its essence is to make direct, inexpensive, instant, and secure exchanges of cryptocurrencies in those blockchains that support the protocol. One of the services supporting this technology is Freewallet.
Freewallet is a digital currency wallet that supports the exchange function inside the wallet. The wallet was created to store and manage various cryptocurrency assets. It was first released in January 2016 in Tallinn, Estonia. Freewallet is supported on both Web and Android/IOS versions.
Recently Freewallet has joined forces with Changelly to combat the crisis by opening off-chain exchanges for a list of 54 coins and ERC20 tokens, including BTC, ETH, EOS, and LTC. Off-chain exchanges are executed in 2–3 minutes and characterized by better rates and enhanced anonymity.
By moving assets outside of the blockchain users are able to enjoy three distinct advantages over on-chain transactions:
- Freewallet customers opting to go off-chain will only have to pay for the exchange of their assets, without having to pay any transaction fees because off-chain exchanges don’t touch upon the blockchain itself. There is no reason to move assets to another cryptocurrency exchange and operate there because the exchange rates provided by Freewallet are as profitable as those at Changelly.
- Off-chain exchanges are executed in 2–3 minutes because they do not depend upon the network load and number of transactions waiting in the queue to be confirmed, so there is no lag time. This advantage can play a significant role in a highly volatile market environment.
- Off-chain exchanges provide users with enhanced anonymity because transfer details are not broadcast publicly. Concerning on-chain transfers, it is possible to partially determine a participant’s identity by studying trading and purchasing patterns. However, even though off-chain exchanges are more anonymous, Freewallet, as a custodial wallet service, is capable of retroactively identifying off-chain exchanges by Request ID should anything go wrong.
It’s worth mentioning that previously off-chain technology was integrated for fee-free transactions between Freewallet users. Additionally, concerning currencies that are not included in the off-chain program at the moment, Freewallet’s built-in-exchange remains available for transfers. You can try Freewallet off-chain exchanges here.