Can Someone Explain "Off-Blockchain Transactions" ?

[sgk]

I recently read in an article that "Off-Blockchain Transactions" are being popular for Bitcoin; in the sense that these transactions are not visible on public Blockchain ledger.

Can someone explain how these transaction are carried out and what implications they have on Bitcoin's decentralised nature?

[notbatman]

Put some Bitcoins in a wallet, extract the secret key and write it on a piece of paper (tip: fold the paper to keep the key secret). You now have the ability to make an off-blockchain transaction with that piece of paper.

[Light]

AFAIK any actual transactions would have to be related to nodes and miners in order for the transaction to be accepted and included in a block. Hence all transactions must and are publicly visible. I might be interpreting this differently from your question - do you have a link to the article?

[Mister S]

Transactions made by a website or brokerage house internally, through an exchange for example, are considered 'off-chain transactions'

No miners fee, no transaction fee, no public record, and no accountability.

Yes, they are becoming popular, and not just for bitcoin. Even the alt-coins are being shuffled around this way.

The problem arises when large amounts of off-blockchain transactions are made. Miners get paid by block generation plus transaction fees. Higher fees, greater incentive.

Take the fees away and it's just block generation, which won't last forever.

[sgk]

Put some Bitcoins in a wallet, extract the secret key and write it on a piece of paper (tip: fold the paper to keep the key secret). You now have the ability to make an off-blockchain transaction with that piece of paper.

I am aware of this method, but the case in question revolves around merchants accepting payments from their customers and keeping these transactions off-blockchain. That's where my thinking goes into void.

AFAIK any actual transactions would have to be related to nodes and miners in order for the transaction to be accepted and included in a block. Hence all transactions must and are publicly visible. I might be interpreting this differently from your question - do you have a link to the article?

http://www.coindesk.com/block-chain-transactions-bad-bitcoin/

[franky1]

imagine you deposit funds into coinbase or BTC-E. instead of withdrawing to someone (an actual bitcoin transaction) you use the exchanges 'balance' transfer features which is just a database representation of holdings to swap balances with another user of that exchange. where coinbase or btc-e do not move actual bitcoins. just a balance change on their users database.

each service calls them something different. such as BTC-E which calls them btc-e codes for instance.

[medUSA]

the case in question revolves around merchants accepting payments from their customers and keeping these transactions off-blockchain. That's where my thinking goes into void.

Let's say there is a imaginary organisation called "OBC".

Alice opens an account in OBC and was given an address for receiving payment. Bob wants to buy something from Alice and sends coins to Alice's address in OBC. OBC credits Alice's account with the btc received. Alice has a choice to withdraw the coins to her own address or keep them in OBC. Alice decides to keep them in OBC.

Alice now wants to buy something from Charlie. Both Alice and Charlie has a OBC account. So Alice transfer the coins from her account to Charlie's account. This is an off-chain transaction.

[sgk]

imagine you deposit funds into coinbase or BTC-E. instead of withdrawing to someone (an actual bitcoin transaction) you use the exchanges 'balance' transfer features which is just a database representation of holdings to swap balances with another user of that exchange. where coinbase or btc-e do not move actual bitcoins. just a balance change on their users database.

each service calls them something different. such as BTC-E which calls them btc-e codes for instance.

Thanks for the explanation, I understand it better now. Just like a bank 'adjusts' balances between different accounts rather than actually 'transferring' the money.

So in order to make this work, both parties (buyer and seller) have to be using the same exchange (for example Coinbase), right?

[galbros]

imagine you deposit funds into coinbase or BTC-E. instead of withdrawing to someone (an actual bitcoin transaction) you use the exchanges 'balance' transfer features which is just a database representation of holdings to swap balances with another user of that exchange. where coinbase or btc-e do not move actual bitcoins. just a balance change on their users database.

each service calls them something different. such as BTC-E which calls them btc-e codes for instance.

Thanks for the explanation, I understand it better now. Just like a bank 'adjusts' balances between different accounts rather than actually 'transferring' the money.

So in order to make this work, both parties (buyer and seller) have to be using the same exchange (for example Coinbase), right?

This is a great explanation.  Yes, both parties have to be using the same exchange.  Off block chain transactions became very popular with gambling sites after satoshidice started accounting for so many transactions in the blockchain.  You can imagine the problems (or maybe benefits if you don't like them) that would result if every transaction at one of the casinos or dice sites had to be on the blockchain, hence off block chain transactions.

Good Luck!

[zimmah]

Transactions made by a website or brokerage house internally, through an exchange for example, are considered 'off-chain transactions'

No miners fee, no transaction fee, no public record, and no accountability.

Yes, they are becoming popular, and not just for bitcoin. Even the alt-coins are being shuffled around this way.

The problem arises when large amounts of off-blockchain transactions are made. Miners get paid by block generation plus transaction fees. Higher fees, greater incentive.

Take the fees away and it's just block generation, which won't last forever.

If off-blockchain transactions are made just to avoid mining fees it means mining fees are too high. If that's the case miners will lower the fees because a large amount of small fees is better then a tiny amount of large fees.

Off-chain transactions can sometimes be handy for the purpose of not spamming the blockchain though.

[Light]

If off-blockchain transactions are made just to avoid mining fees it means mining fees are too high. If that's the case miners will lower the fees because a large amount of small fees is better then a tiny amount of large fees.

Off-chain transactions can sometimes be handy for the purpose of not spamming the blockchain though.

Mining fees are fine as they are. The only people complaining are those who are so tight they can't afford 5c (0.5c once reference implementation is accepted) for the cost of a transaction. Miners at the moment don't care about fees - they represent a minuscule amount compared to block rewards.

@OP: Having read the article - the conclusion that I'm coming to is that it's bad for decentralisation. You're effecting giving up control of yours coins on the premise of being paid what your promised. Until then a specific person/body has a large amount of coins to play with. It really seems like the inputs.io scam all over again. The few times it is useful is if your making many small transactions where the fee would eat the tx - but those are exceptional cases.

[cuddaloreappu]

all transactions are to be included in the blockchain..there cannot be any transaction outside..

off blockchain transaction simply means that a ledger is maintained outside the blockchain and then injected into the official blockchain after some time, typically what happens in coinbase and in some altcoin exchanges..

speed is one reason i believe reason for off blockchain tranaction.

[battani]

all transactions are to be included in the blockchain..there cannot be any transaction outside..

off blockchain transaction simply means that a ledger is maintained outside the blockchain and then injected into the official blockchain after some time, typically what happens in coinbase and in some altcoin exchanges..

speed is one reason i believe reason for off blockchain tranaction.

How would they inject transactions into the official blockchain, after-the-fact?

[DeathAndTaxes]

So in order to make this work, both parties (buyer and seller) have to be using the same exchange (for example Coinbase), right?

Today yes but imagine a scenario in the future where a group of such entities have mutual agreements to instantly process transactions between each other.  They then settle up at the end of the day.   So say between cbase and dbase there were a total of 1000 BTC transferred from cbase users to dbase users and 900 BTC from dbase users to cbase users.   cbase would make a single on blockchain transaction sending 100 BTC to dbase settlement address.  Thousands (maybe millions) of transactions between the two entities settled with a single end of day transaction.

If this sounds vaguely familiar it is how transfers between banks work.

[sgk]

So in order to make this work, both parties (buyer and seller) have to be using the same exchange (for example Coinbase), right?

Today yes but imagine a scenario in the future where a group of such entities have mutual agreements to instantly process transactions between each other.  They then settle up at the end of the day.   So say between cbase and dbase there were a total of 1000 BTC transferred from cbase users to dbase users and 900 BTC from dbase users to cbase users.   cbase would make a single on blockchain transaction sending 100 BTC to dbase settlement address.  Thousands (maybe millions) of transactions between the two entities settled with a single end of day transaction.

If this sounds vaguely familiar it is how transfers between banks work.

Thanks for the explanation. Yes, it is similar to how banks operate.

I think the main benefit here would be speed (no need for confirmations) and keeping the blockchain free from cluttered transactions.

[DeathAndTaxes]

I think the main benefit here would be speed (no need for confirmations) and keeping the blockchain free from cluttered transactions.

The cost would be centralization and counterparty risk.   In a multi entity arrangement entities need to provide a line of credit to other entities.  So maybe you choose correctly and trust dbase which does nothing wrong but cbase runs into financial trouble and eventually collapses resulting in losses for dbase.  Now in a 2 entity arrangement that may be where it ends but imagine a scenario where you have abase ... zbase.   One entity runs into financial trouble which affects the finances of other entities who also collapse affecting the finances of other entities and the risk and loss ripples outward.  Much like how losses in one bank can present a systemic risk to the entire system.  Now in the fiat world you have the central bank who can print money at will and pump it into the remaining banks to shore them up and prevent a systemic collapse.

The short version:
If you don't have the private key for your bitcoins, you don't have any bitcoins.

[bountygiver]

I have a feeling that off-chain transaction partially defeats the purpose of BTC, if you gonna hand the paper why don't you just use cash?
Also, the payee also knows the private key in this case, which is very stupid, remember the most important lesson of owning BTC: IF you are not the sole owner of the private key, you don't own any BTC in it.

[justusranvier]

I have a feeling that off-chain transaction partially defeats the purpose of BTC.

It does defeat the purpose of BTC, yet it's going to take a long time to get rid of them, and there will probably always be some role for them.

In the meantime there are ways of making them less insecure, especially in the case of currency exchanges.

[battani]

Bitcoin services implement off-blockchain transactions because of the high miner fees and long confirmation times. Most developers really wish they could decentralize — it's more secure and they don't have to hold the raw private keys. Unfortunately, decentralization kills the user experience.

[giszmo]

A special case of off chain transactions are transaction channels.  These are free of third party risk and can be extended to multi server hops like email with virtually no third party risk.

generally are off chain transactions necessary to allow 7billion people to participate. 7billion people can't do more than one on chain transaction per 5 years if we keep the block size at 1mb/10min. If you want 5 * 360 * 10 transactions per 5 years you better fin another solution than to increase the block size x18000.