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Off-Chain Transaction Meaning

A transfer of value that is not immediately recorded on the blockchain. Instead, the transaction is recorded in a secondary layer or a private ledger, and the final result is settled on-chain later.

A classic example is the Lightning Network for Bitcoin, where two parties can exchange thousands of transactions back and forth, only broadcasting the final balance to the Bitcoin blockchain. Off-chain transactions are essential for Micropayments.

Sending $0.50 on Bitcoin might cost $5.00 in fees if done on-chain, but it costs a fraction of a penny off-chain. This viability opens up new business models like paying per second for video streaming.

While efficient, off-chain transactions introduce different dispute resolution mechanics. If something goes wrong off-chain (e.g., a counterparty tries to cheat), the protocol must have a mechanism to fall back to the main chain to resolve the conflict and ensure the correct funds are paid out.

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