What Is Off-Chain Data and Computation?

What is off-chain data? Off-chain data, sometimes known as real-world data, is any data that is external to a blockchain, such as sports scores, weather data, and financial market data, as well as data on other blockchains. Blockchains are, by their very nature, isolated systems, so connecting a blockchain to off-chain data is like connecting a computer to the Internet—it enables an isolated system to interact with the real world. The high-security guarantees of blockchains must be upheld when accessing off-chain data, which is why Chainlink trust-minimized services have become an industry standard. 

What Is Off-Chain Data and Computation?

Another off-chain mechanism that increases the utility of blockchains is off-chain computation, which includes verifiable randomness, transaction ordering services, and smart contract automation. Off-chain computation is simply a computation that takes place outside a blockchain. Oracle networks can provide a trust-minimized form of off-chain computation to extend the capabilities of blockchains—this is known as oracle computation. Empowering blockchains with off-chain computation is like connecting a laptop to a cloud service like AWS; it exponentially expands the available compute power and enables high-performance yet cost-efficient applications to be built. 

Why is off-chain data and computation so important to the Web3 ecosystem? 90% of smart contract use cases require access to off-chain data, including much decentralized finance (DeFi) use cases, parametric insurance, and dynamic NFTs. Off-chain computation helps these applications to scale in a cost-efficient and privacy-preserving manner, as well as introduce more advanced functionality such as automation and randomness. Together, off-chain data and off-chain computation enable developers to build feature-rich and scalable hybrid smart contracts that can help solve real-world problems for millions and eventually billions of users. 

In this article, you’ll learn how oracles connect blockchains to off-chain data and computation, the difference between off-chain and on-chain data, explore the advantages unlocked by off-chain resources, and learn why Chainlink is the leading solution for connecting off-chain resources to blockchains. 

Connecting Off-Chain Resources to Blockchains With Decentralized Oracle Networks 

When a blockchain is connected to off-chain resources, the computational power and data available to smart contracts dramatically expand. While it’s possible to leverage centralized off-chain services like those in Web2, that would introduce a single point of failure, undermining the security guarantees that blockchains provide. 

In order to connect blockchains to off-chain data, developers need to overcome the “oracle problem,” which describes the inability of blockchains to connect to external resources in a highly secure and tamper-proof manner. Chainlink solves the oracle problem by enabling decentralized oracle networks (DONs) to operate as a secure middleware layer connecting off-chain resources to blockchains. The Chainlink Network is the industry-leading oracle network and is responsible for helping secure tens of billions of dollars across the Web3 ecosystem. 

Decentralized oracle networks (DONs) expand the data accessibility and computational power of blockchains and smart contracts in a trust-minimized manner in order to not compromise on security. DONs enhance the performance, functionality, and interoperability of blockchains by enabling hybrid smart contracts. These contracts fuse the trust-minimized properties of blockchains with the feature-richness of off-chain computing resources and data to enable more advanced applications and use cases that are impossible with on-chain systems alone.

Image showing how smart contracts connect to external data.
Decentralized Oracle Networks (DONs) enable smart contracts to securely connect with external data and systems.

On-Chain vs. Off-Chain

Blockchains are immutable, deterministic, highly secure, and censorship-resistant ledgers secured by a network of full nodes. While this design endows blockchains with a high level of security and determinism, it also means that blockchains often have to make tradeoffs around privacy, speed, and decentralization. However, by combining blockchains with off-chain systems, blockchains are able to extend their capabilities, from lowering costs and increasing throughput by moving computations off-chain to incorporating real-world information in on-chain executions. 

Image comparing off-chain and on-chain resources.

Hybrid smart contracts combine on-chain code with off-chain decentralized oracle networks to enable more advanced blockchain-based applications.
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