Georgetown Law
Technology Review

Bitcoin off-chain transactions are transactions in bitcoin that are not recorded on the blockchain.1AM. BAR ASS’N, DIGITAL AND DIGITIZED ASSETS: FEDERAL AND STATE JURISDICTIONAL 34, (2019), https://www.americanbar.org/content/dam/aba/administrative/business_law/buslaw/committees/CL620000pub/digital_assets.pdf [https://perma.cc/W5WC-95FQ] [hereinafter ABA DIGITAL ASSET PAPER] (defining off-chain transactions in a bitcoin exchange context as “[a] trade between two parties transacting using a [centralized exchange] is not necessarily recorded on the blockchain”); Lewis Gudgeon et al., SOK: Layer-Two Blockchain Protocols, 2019 IACR CRYPTOLOGY EPRINT ARCHIVE 1–2 (defining off-chain transactions in a software protocol context as protocols that enable users to transact “through private and authenticated communication, rather than broadcasting every single transaction on the (parent) blockchain”). Today, most bitcoin transactions occur off-chain.2See Matthew Hougan et al., Bitwise Asset Mgmt., Comment Letter on the Proposed Rule Change Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E (May 24, 2019), https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5574233-185408.pdf [https://perma.cc/NKE6-MTY7]; infra note 10 and accompanying text. This dynamic runs counter to the quintessential principle espoused in the initial white paper conceptualizing bitcoin—that transactions would be immutably and reliably recorded on a public ledger.3SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM 1, 8 (2008), https://bitcoin.org/bitcoin.pdf [https://perma.cc/HH9T-EHAS] [hereinafter BITCOIN WHITE PAPER] (proposing a “peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change”). As regulators voice concerns over bitcoin’s divorce from its ledger technology, this explainer provides an understanding of this innovation’s implications on privacy, security, settlement speed, and usability.

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