Even though Bitcoin is based on an immutable blockchain, there are hundreds more cryptocurrencies, and not all networks have transactions taking place directly on the chain.
The off-chain transactions are transactions processed outside the blockchain. These are second layer protocols aimed at circumventing network weaknesses and enabling cheaper and faster transactions.
How does it work?
Users can open a channel and exchange wallet private keys. While the channel is active, you can continue to exchange currency for an unlimited amount of time. When users are ready to complete the transaction, they close the channel and the final settlement information is entered into the blockchain.
Advantages of the off-chain transactions are:
🔸 They can be executed instantly.
🔸 Off-chain transaction usually don’t have a transaction fee, as they don’t occur on the blockchain.
🔸 Off-chain transactions give more anonymity to the participants because details are not publicity broadcast.