NFT On-Chain vs. Off-Chain Data

The main smart contract or alternative. The record of who owns the NFT at the current time, and the history of ownership since minting.

How and where does payment for an NFT sale take place.

All the typical functionality of an auction, including a starting bid, minimum bid increments, and duration etc.

Public and auditable. The publicly verifiable and timestamped certificate of ownership is the value proposition of the NFT.

• Secure and reliable. Major blockchains are secure databases with no single point of failure. Breaches of the security of the network itself are nearly non-existent for blockchains like Ethereum and Bitcoin.

• Large potential audience. Ethereum has over 6 million monthly active addresses (Glassnode).

• 100% uptime.

• Side-chains. E.g. Polygon is a popular Ethereum sidechain for increased transaction speed and throughput with lower fees. Bridges with Ethereum to benefit from its security.

• Layer 2. E.g. Optimism and Abritrum are layer 2 solutions which batch transactions and submit them "rolled up" as a single transaction on the Ethereum blockchain. Layer 2's are a fraction of the cost and execute faster. Final settlement occurs on the Layer 1 blockchain.

Public payment history. Viewable on-chain. Anyone can verify the value of the NFT through its lifetime.

• Escrow possible. The NFT can be placed in an escrow contract. The buyer sends payment to the contract on-chain, and the NFT is automatically transferred to the address where the payment came from once the owner accepts payment to their address.

Public bidding. Participants can verify actual auction activity. (Secret bidding is also possible using a commit/reveal or a zero-knowlege transaction.)

• Guaranteed escrow. Both buyer and seller do not have to worry that the sale will be cheated, unfunded, renegged upon, or unable to complete.

Possibly too much transparency. Anyone can find the ownership of the NFT by looking through a block explorer like Etherscan.

• Inability to reverse. Blockchain transactions cannot be reversed. Care must be taken to ensure all information is correct before finalizing the transaction.

• Difficulty of automating actions. A transaction must be signed with a private key at the time of transfer requiring special models for security.

• Requires some user knowledge. Buyers and sellers must have crypto wallets set up and have transferred funds into them in order to transact directly on the blockchain.

• Speed. Chains like Ethereum take time to confirm settlement, between minutes and hours. (Though other chains like Polygon and Avalanche optimize for faster transaction times.)

Lack of buyer privacy. Some owners or sellers may not want others to know how much they paid for an NFT.

Cost for high activity. In an active auction, every bid would incur a transaction cost.

• Visible. All bids are visible by default.

• Difficult to do secret bidding. Compared with existing off-chain solutions.

Zora is one implementation of an on-chain auction market.

Private.

• Total control. The ledger would be a closed ecosystem.

• No transaction fees.

• High speed. Or can be scaled with investment.

Familiar payment methods. Can pay with traditional methods like credit cards.

• No buyer knowledge required. Easier onboarding.

• Reversible payments.

Fully customizable. Easier to customize the auction mechanism to include secret bidding, sealed bidding, or advanced bidding.

• Low fees. In a highly active auction, being off-chain can save substantially on the gas fees required to submit bids.

Not verifiable. A private ledger is not a publicly verifiable blockchain. Requires participants to trust the host.

• Single point of failure. Which is vulnerable to attack and service downtime.

• Significant responsibility for security. Costs to maintain and monitor a digital marketplace.

• Non-transferable. The NFTs cannot be moved outside of the ecosystem.

• No guarantee of longevity. If the provider goes away, the NFTs are lost. This reduces trust in the initial purchase.

Requires trust. Requires buyer to trust the seller or marketplace.

Requires trust. Buyers have to trust both the auction house and the owner of the NFT.

A private ledger or database can contain the data and a list of transactions.

Privacy - If NFTs remain on a private network they remain confidential, with an option for users to transfer onto a public blockchain network.

Flexibility. Users who prefer the security and settlement of the blockchain have the option, and users who prefer traditional payments can still purchase an NFT.

Best for platforms which support multiple auction types.

Complexity. Managing transfers of ownership between both on and off-chain systems requires active management.

Complexity. Syncing inventory between two payment systems adds an additional layer of product management.

Developing an auction platform that functions both on and off-chain duplicates significant amounts of time and effort.

Transactions should not be duplicated. A record of transactions could be stored off-chain as a backup.

• Possibilities include: Off-chain system, but allow transfers out of the private network. Start off-chain but plan to migrate on-chain. Certain types of NFTs remain off-chain but others on, due to legal or privacy restrictions.

Offering both on-chain and off-chain payment methods is possible. Payments off-chain does not even require the buyer to hold cryptocrrency.

Simplest bidding done on-chain, while advanced functionality remains off-chain.

The timestamped signature that proves ownership publicly and verifiably is the core innovation of the NFT.

Flexibility for users unfamiliar with the blockchain, while maintaining security and final settlement by being on-chain.

In a highly active auction, being off-chain can save substantially on the gas fees required to submit bids.

Information like name, description, date created, and the address of the creator as well as custom property information like rarity, collection name, and license information.

The data of the image, video, or other media.

Media or something else where only holders of the NFT have access.

High flexibility. The type and parameters of Metadata can be easy to change over time.

Low storage costs.

• High speed. The speed of data retrieval (seeing your NFT art or collectible) is only limited by the connection to a cloud server.

• High flexibility. Many types of data could be stored on IPFS or cloud storage in various configurations.

Simpler. Holder uses their wallet credentials to gain access. After that it would be like any private site.

Mutability. Any information stored off-chain could be edited. Buyers have less confidence that their NFTs' attributes are secure.

Security and reliability. If the file storage system shuts down, or if the file is moved years in the future, the URL stored on-chain would not point to any data.

• Centralized point of failure. This does not apply to decentralized storage like IPFS. Centralized storage solutions are vulnerable to attacks, but the most popular options have extremely robust security standards.

• Integrity vulnerability. Data stored with a third-party is at risk of being altered or removed.

Membership limited to one marketplace. NFT's benefit from interoperability between companies and services. The "members-only" club on-chain works as long as the chain and media are accessible. An off-chain exclusive area is limited to a single marketplace or company.

Options:

• Cloud storage systems like Microsoft Azure and Amazon S3 are often used for centralized solutions and are definitely used for caching data.

• Private storage with a virtual private server are possible as well.

Tamper-proof. Once the data is on-chain, you know it is true and verifiable.

High security and reliability. All the security, reliability, and tamper-proof benefits of the blockchain apply to the media.

• Simpler concept. No external links to data.

Provable presence. If the data is on chain the buyer can be sure there is special media available for the owner.

Higher fees. The more data stored on-chain, the more expensive an NFT is to mint and transfer. Metadata varies in size and complexity.

Really high fees / not possible. Usually prohibitively expensive.

• Limited size. Media could be stored on chain but would have to be quite small.

• Lower speed or higher complexity. Blockchain tools are generally not designed around handling large amounts of data.

Complicated implementation. Since the blockchain is public, the data would have to be encrypted.

• If compromised cannot be removed. If the key for the token-gated data is compromised, it could be difficult to make the unavailable again.

Media can theoretically be stored on a blockchain but practically the amount of information makes the cost prohibitive.

Could be on-chain and encrypted however this is not a standard practice.

Secure, verifiable, and recoverable with backups.

• Low cost. Benefits from decentralization similar to a blockchain but without the expensive transaction fees.

Security. IPFS does not benefit from the Proof-of-Work or Proof-of-Stake security that blockchains employ.

Public. Sensitive documents could be encrypted but this adds complexity and you lose some of the benefit of an open system.

By definition IPFS is public. Would be complex to encrypt files and gate access on IPFS.

InterPlanetary File System (IPFS) is a common and decentralized way to store NFT data. It has similarities to blockchain storage. IPFS uses a peer-to-peer network of nodes to store files. Anyone can run a node and connect to the network.

Metadata and media fall in a special category where a hybrid approach is recommended:

On-Chain NFT => IPFS Metadata and Media => Cached / mirrored on cloud infrastructure

Save cost by keeping additional metadata on IPFS, and critical data fields on-chain.

IPFS is the de-facto standard for decentralized and cost-effective file storage.

Easiest way to privately gate media for your specific project.