Off-Chain Settlement

Off-chain settlement is the completion of a transfer of digital assets, or of the value they represent, without recording a separate transaction on the underlying blockchain. Instead, the change in ownership is recorded somewhere else: in the internal ledger of an exchange or custodian, in a payment channel between two parties, or in a layer 2 system that later posts summarised results to the main chain. Transfers between two customers of the same exchange, for example, are usually settled off-chain by updating the exchange's books. Off-chain settlement is faster and cheaper than writing every transfer to the chain, and it keeps details private, but it relies on the operator's records or on the rules of the channel or protocol until the final position is recorded on-chain. It is the counterpart of on-chain settlement and is closely linked to the off-chain layer and payment channels.