This article focusses on discussing the differences between Off-chain, Side Chain, and State Channel Blockchain.
What is Off-chain?
On a cryptocurrency network, transactions that shift value away from the blockchain are referred to as “off-chain transactions.” Off-chain transactions are becoming more and more common due to their nil or cheap costs, particularly among big participants. Off-chain transactions can function utilizing a third-party or coupon-based intermediary, by exchanging private keys to an existing wallet in place of transmitting money, or both.
A transaction off the blockchain removes the value from the blockchain. It can be carried out in a variety of ways:
- The parties to a transaction may consent to a transfer.
- Using a third party who promises to uphold the deal, such as a guarantor. These principles are used by PayPal and other contemporary payment processors.
- In exchange for the cryptocurrency tokens, a participant purchases coupons and transfers the code to a third party so they can use it to redeem the coupons.
Off-chain Protocols:
- The Lightning Network: On top of the Blockchain of Bitcoin, the Lightning Network is a Layer 2 protocol that enables users to swiftly and cheaply complete an endless number of transactions. Users can communicate on this decentralized peer-to-peer network by encrypting their Bitcoin in a multi-signature address and supporting it with a funding transaction.
- Liquid Network: Since the Liquid Network uses a sidechain protocol, transactions are carried out separately from data storage on the Bitcoin blockchain. The Liquid Network is more affordable, quicker, and more secretive than the main Blockchain, which means it hides the amount of money involved in a transaction.
- Custodial Services: A third-party service known as a “custody solution” is one that stores and protects tokens on behalf of institutional investors who deal in significant amounts of bitcoin. Private keys and online wallets can also be used to hold tokens, but they are not completely secure.
Pros of Off-chain:
- Faster transactional times: Off-chain transactions can be processed more quickly, often instantly, because there is no need to wait for the main blockchain network to complete a transaction.
- Lower cost: Because the process of validating through mining or staking is not necessary, transactions confirmed off-chain incur little or no fees. In particular, this capability comes in handy when working with high cryptocurrency amounts.
- Greater anonymity: Off-chain transactions provide more privacy since the information is not broadcast to the network in a public manner.
Cons of Off-chain:
Off-chain techniques have a variety of drawbacks, but some of these include:
- Less transparency: Off-chain transactions do not adhere to the same protocol as blockchain transactions, which increases the possibility of disagreements.
- Absence of a consensus method: Authentication and validation may be handled by an intermediate if there isn’t a consensus among all users on the network. This means that rather than letting all of the network’s users agree as a group, trust must be provided to this third party.
- Less secure: Operating outside of the blockchain makes a network more susceptible to fraudulent conduct because blocks added to a blockchain cannot be changed.
What is Side Chain?
With the help of sidechains, which are new methods, tokens and other digital assets from one blockchain can be safely used in a different blockchain and then transferred back if necessary. The potential for sidechain functionality to improve the capabilities of current blockchains is enormous.
The ability of sidechains to enable a more seamless asset exchange between the mainnet and the secondary blockchain is one of their fundamental features. This enables projects to expand their ecosystem in a decentralized manner by safely transferring digital assets like tokens between blockchains. Projects for connecting data between public blockchains include Cosmos, Plasma, Matic, and Polkadot.
Key components of sidechain:
- Two-way peg: Digital currencies like bitcoin can be moved back and forth between the mainnet and the brand-new sidechain thanks to a two-way peg. It’s interesting to note that there is never a “transfer” of a digital asset. The assets are simply locked on the mainnet while an identical quantity is unlocked in the sidechain; they are not truly moved.
- Smart contracts: Smart contracts, to put it simply, are blockchain-based algorithms that execute when certain criteria are satisfied.. They are often used to automate the implementation of an agreement so that all parties can be certain of the conclusion right away, without the need for an intermediary or additional delay. They can also automate a workflow such that when circumstances are met, the following action is executed. By requiring validators on the mainnet and sidechain to perform honestly while validating cross-chain transactions, smart contracts are utilized to ensure that fraud is kept to a minimum. A smart contract will alert the mainnet that an event has transpired once a transaction has taken place.
Sidechains in practice include the Liquid Network for Bitcoin and RootStock (RSK). Only transactions involving bitcoin are feasible since both sidechains are connected to the main Bitcoin network.
Pros of Sidechain:
- Sidechains are based on well-proven technology that has benefited from substantial research and design advancements.
- Sidechains provide EVM compatibility and support generic computing (they can run Ethereum-native dapps)
- In order to efficiently execute transactions and reduce transaction costs for users, sidechains employ several consensus models.
- Dapps can grow their ecosystem thanks to sidechains that are EVM-compatible.
Cons of Sidechain:
- Scalability is sacrificed by sidechains to some extent for decentralization and trustworthiness.
- Because a sidechain employs a different consensus algorithm, it is not protected by Ethereum’s security features.
- Sidechains demand more reliable assumptions (e.g., a quorum of malicious sidechain validators can commit fraud).
What is State Channel?
State channels, sometimes known as “off-chain” transactions, are a method through which users do business with one another directly outside of the blockchain with little or no reliance on “on-chain” processes. The most advanced scaling solution for Ethereum that is most likely to be ready for production is this one. The idea behind state channels is quite similar to that of payment channels in the Lightning Network of Bitcoin, but rather than just facilitating payments, state channels also support broader “state updates.”
State channels reduce the computational strain that nodes must endure when processing and storing transactions, increasing the throughput of public blockchains. The process of validating the miners’ work will become more decentralized because it will be simpler to run a node as a result. Similar to this, State Channels lower the price associated with using the Ethereum network.
Key components of state channel:
- A portion of the blockchain’s state is secured using multisignature or a smart contract, requiring unanimous agreement from a certain group of participants in order to be updated. By creating and signing transactions that could be included to the blockchain but are currently just held onto, participants change the state among themselves. The most recent update “trumps” all earlier updates.
- Participants then submit the state back to the blockchain, which shuts down the state channel and releases the state once more (usually in a different configuration than it started with). Popular state channel initiatives include Trinity, Raiden Network, The Lighting Network, Celer Network, and Liquidity.
Pros of State Channel:
- Cheap: The cost of validators is paid by participants when channels are opened and closed. Even when there are hundreds or thousands of other transactions, they are all free.
- Privacy: Every on-transaction is recorded in the Blockchain ledger and made publicly accessible. Anyone can examine these Blockchain data and gain personal insights.
- Security: The security of payment channel states depends on the smart contract’s validation process and the information contained in the states, such as the channel ID, state and stakeholder status, state nonce, and smart contract address.
Cons of State Channel:
- State channels work best in applications with a predetermined group of users: This is necessary because the participants/entities (i.e., addresses) that are a part of a specific channel must always be known by the state deposit contract (the contract used to lock the state). We can amend the contract each time we add or delete someone, though.
- Price of a status update inside the channel is minimal: Since there is a one-time fee associated with setting up a channel when implementing the state deposit contract, state channels are especially helpful in situations where participants will be exchanging numerous state updates over a long period of time. However, after deployment, the price for a status update inside that channel is very minimal.
Off- chain vs Side Chain vs State Channel
Below are some of the differences between off-chain vs side chain vs state channel:
| Parameters | Off-chain | Side Chain | State Channel |
|---|---|---|---|
| Working | A transaction that cannot be validated by reading the blockchain is referred to as an “off-chain transaction.” The blockchain network cannot determine whether or not the transaction actually took place because it is not reflected on the blockchain. |
In essence, a side chain is a branch of the main chain. As a result, this side chain can be processed and blocks added without affecting the main chain. | In essence, state channels are a technique of carrying out a transaction. Here, the parties concur to perform the transaction off-chain or privately for a while (this could be to avoid a huge transaction fee otherwise) |
| Security | Less secure due to lesser transparency | Secure but is using a different consensus algorithm | Highly secure |
| Transaction | Participants in State Channels rely on mutual agreements that are verified by their blockchain encryption signatures. Before leaving the blockchain, the parties elaborate on the state of their transactions in a smart contract. | Participants can execute as many transactions as they like while off-chain without relying on miners’ verifications. Additionally, they do not demand the creation of fresh blocks for every transaction. | After designating specific output transactions in the main chain as no longer being processed in the main chain, side chains are typically constructed. Only the side chain can process these transactions and the offspring of those transactions. |
| Cost | It has a lower cost | Relatively expensive | It is almost free |