The Difference Between On-Chain Vs. Off-Chain NFTs
NFTs are a form of digital assets widely believed to be impervious to many risks and to have a permanent record on a blockchain. While this is true, it’s important to understand that NFT media is not stored the same way for all projects.
The hype over non-fungible tokens (NFTs) is still apparent even during the bear market, and more and more people are eager to jump on the NFT train. But with any major decisions, it’s crucial to be well-informed.
Of course, various things determine the value of an NFT collection or a specific NFT itself. But much of it comes down to how to read the data behind those assets. Luckily, various on-chain tools are helpful for newbies and experienced crypto investors.
However, knowledge of different crypto terms is necessary as well.
While it’s a common perception that blockchain technology gives NFTs the guarantee that they cannot be tampered with and are eternal, it’s not entirely true for all NFT projects. And that’s where the distinction between on-chain and off-chain NFTs becomes important.
Keep reading to discover the difference between on-chain vs. off-chain NFTs, their possibilities, risks, and how to distinguish between them.
On-Chain NFTs Explained
On-chain NFTs are written solely on the blockchain and have all their metadata and smart contracts stored on-chain.
So basically, the data of these NFTs are all written on the mainnet, and then the information is stored on the blockchain. This information also consists of things such as the transaction hash of the generated NFT, making it more unique.
Besides that, on-chain NFTs include two important data components:
- Metadata is the core information of a specific NFT - its’ description, unique traits, where the digital copy is stored, and more. As this metadata is integrated with the on-chain NFT, the information itself lives on the blockchain as well.
- Smart contracts refer to programs that execute automatically when certain criteria are met. Generally, they can generate on-chain NFTs or point to locations where the NFTs are stored.
As everything - the metadata, smart contract, and NFT are stored on the blockchain, there’s no need to rely on external systems or a third party. Therefore, as long as the blockchain works fine, the NFT collection is always available.
However, while being on the blockchain is a huge benefit, it can be a little difficult for investors who haven’t got much experience in the blockchain market to get started. Therefore, it can slow down the mainstream adoption of NFTs.
Off-Chain NFTs Explained
While on-chain NFTs live entirely on the blockchain, off-chain NFTs don’t. They exist in two parts - the smart contract and the metadata for the actual artwork.
The smart contract exists on a blockchain containing a set of rules which facilitate the transaction and serves as a digital description of the content. The smart contract also contains a link that points to the server that stores the digital artwork, which may not be stored on a blockchain, but off-chain.
There are multiple options for off-chain storage, such as on Google Drive, Dropbox, iCloud, centralized hardware server storage, or IPFS (interplanetary file system) nodes.
Such storage options, however, come with two main challenges:
- Risk of losing the NFT - as with any centralized server or storage, the owner has the power to shut it down anytime. The link will break, and the file will be lost.
- Risk in security simply because such servers can be hacked.
However, IPFS, in this regard, is one step ahead of other storage options. IPFS provides a more secure method of storing data by using a P2P storage network, which is distributed and decentralized.
This means that in the case one storage location fails, it will be backed up by another. But even though, IPFS is still not the ideal solution.
But naturally, on-chain and off-chain NFTs have different purposes. Some upsides of having off-chain NFTs are
- The possibility to buy NFTs without having much blockchain experience. Bids can be made using fiat currency on off-chain platforms where there is no need to create a crypto wallet for the NFTs. For instance, NBA Top Shot investors can leave their Moments in a custodial wallet managed by Top Shot.
- No gas fees. Purchasing and trading NFTs on on-chain marketplaces come with gas fees, which can change drastically just within a day. Sometimes the gas fees alone can be over $100. Therefore without having to pay the gas fee for off-chain NFTs, buying and owning NFTs becomes more affordable for more people.
Why aren’t all NFTs on-chain?
While at first glance, it can seem natural that on-chain NFTs are a better option, it’s not as simple. Like with many things, the cost is a huge factor.
An average NFT collection consists of 10 000 NFTs, which is quite a massive amount of data to be stored on the blockchain. This results in higher gas fees for creators and developers, and most can’t survive that.
For instance, CryptoPunks moved its 10 000 NFTs to live fully on-chain, but this move cost Larva Labs over 73M in gas.
How To See If An NFT Is Off-Chain?
To understand if an NFT you are considering purchasing is on-chain or off-chain, you can use OpenSea and Etherscan.
- Go to the OpenSea marketplace and look up the NFT you want to receive information on
- Scroll down to “Details” that you find in the left-hand column and click the link next to “Contract Address.” This will redirect you to Etherscan
- Click the “Contract” tab
- Select “Read Contract”
- Scroll down to the “token URI” dropdown box
- Insert the ID number of the token that you can find in the name of the NFT. For instance, OnChain Monkey #5717. (You just need to insert the number 5717).
- Press “Query”
If a link appears, the artwork is stored off-chain.
Let’s take OnChain Monkey #5717 as an example. On Etherscan, you will see that no link appears after you’ve submitted the Query, meaning it lives on-chain.
However, for Power Music Club #101, a link appears.
Both on-chain and off-chain NFTs have their own pros and cons, and in the end, to each their own.
Whereas on-chain NFTs need an understanding of blockchain technology to get started, it’s an easier option for storage and trading. Then again, off-chain NFTs are more accessible for new investors, although the lack of security needs to be considered.
Of course, not everything is black and white, and research into the project’s roadmap, artists, and developer teams will give you a good overview of their intentions and capabilities.