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On-chain transactions are the core mechanisms that power decentralised networks. 

Put simply, on-chain transactions refer to the process of recording and validating transactions directly on a blockchain. Unlike traditional financial systems, there are no intermediaries involved (e.g. a bank). Instead, transactions are added to a blockchain using cryptography.

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On-chain transactions are built up of three main principles, which are:

• Cryptographic Signatures: Each participant in a transaction has a private key and a public key. The private key is used to create a unique digital signature, while the public key is used to verify the signature. This ensures the integrity and security of the transaction.
  
  
• Decentralised Validation: On-chain transactions are validated by a decentralised network of nodes, using consensus mechanisms such as proof-of-work (PoW) and proof-of-stake (PoS). This ensures that transactions are secure, transparent and resistant to censorship.
  
  
• Smart Contracts: Self-executing contracts with the terms and agreements written into the code. These contracts automate the execution of predicted actions when specific conditions are met. On-chain transactions often involve interacting with smart contracts, as it adds a level of programmability.

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The lifecycle of an on-chain transaction

• Initiation: The user initiates a transaction by creating a digital wallet and signing the transaction with their private key.
  
  
• Broadcasting: The signed transaction is broadcast to the network. Nodes on the network receive the transaction and circulate it to other nodes.
  
  
• Validation: Nodes validate the transaction by confirming the digital signature, checking the sender’s account balance, and ensuring the transaction meets network rules.
  
  
• Block Inclusion: Validated transactions are grouped into blocks. From there, miners (PoW) or validators (PoS) compete to add the next block to the blockchain. The winner miner/validator is then rewarded with newly minted cryptocurrency and transaction fees.
  
  
• Confirmation: Once a block is added to the blockchain, the transaction is confirmed. The number of confirmations increases over time as more blocks are added, providing greater security against potential reversals.

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Challenges and Solutions

As Web3 networks continue to grow, scalability becomes a challenge. However, the introduction of layer 2 scaling (e.g. sidechains and state channels) aims to increase transaction throughput without congesting the main blockchain.

Additionally, when transacting on the blockchain, users have to pay gas fees to compensate miners or validators for processing transactions. This is an ongoing challenge, with developments like Ethereum 2.0 exploring alternatives.

Finally, achieving seamless interoperability between different blockchains remains a goal. That’s why we see many projects working on solutions like cross-chain bridges to enable value and information sharing between different blockchains.

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Looking to enter the world of Web3? Look no further!

If you’re looking to offer on-chain solutions for your customers, we can help! 

Working with leading businesses in Web3, we offer a range of crypto-friendly services - from debit cards and white-label apps to payment gateways and exchanges.

Discover how we can help your business by getting in touch today.

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