The transacions not viewable on the blockchain

Those who use a non-custodial wallet, such as Electrum, are accustomed to being able to see in the appropriate list all transactions made to and from their wallet, viewable and recorded on the blockchain. 

However, not all transactions in Bitcoin are actually visible at all times. 

Transactions that are not visible on the blockchain

In fact, only those transactions that are recorded on Bitcoin’s blockchain are public and visible to all. There are, however, transactions that are not recorded on the blockchain, resulting in them not being visible. 

For example, transactions made through Lightning Network (LN), Bitcoin’s layer 2 which enables immediate transactions at a very low cost. LN does not record transactions on the blockchain, so these are not public. They remain visible only to the sender and receiver on their respective wallets.

A similar thing happens on non-decentralized exchanges, such as Coinbase. When an internal transaction is made on a centralized exchange, such as, for example, a purchase or sale of cryptocurrency, that transaction is not recorded on the public blockchain, but only within the exchange’s private database. This database is not visible to users of the exchange, but only to its managers. 

Therefore, for those using an exchange such as Coinbase and a wallet such as Electrum, they will find visible only those transactions that were made directly from the wallet to the exchange, or vice versa, but not those made within the exchange. 

Transactions between the non-custodial wallet and the centralized exchange are, in fact, recorded on the public blockchain, making them visible to everyone. In contrast, those made within the exchange are not recorded on the blockchain, thus, are not visible except to the managers of the exchange itself. 

What’s more, centralized exchange operators usually move user tokens from their wallet embedded in the exchange, and linked to their account, to generic wallets that they use somewhat for all users. Thus, not only do they not record internal transactions on the blockchain, they do not even make it possible for the user to track these internal movements, because they do not in fact happen. 

The management of tokens by centralized exchanges

In fact, once tokens are moved to the exchange’s generic wallet they generally stay there until they are picked up by some user, regardless of how many times they are exchanged. 

The reason why centralized exchanges do not register internal transactions on the blockchain is very simple: they do not want to pay fees. Registering an internal transaction on their database does not charge any fees, while a transaction on the blockchain always requires payment of a fee. Given that they handle billions of transactions this seems a decidedly valid reason. 

A different matter, however, concerns decentralized exchanges, which record all transactions on the blockchain. In this case, however, the expense related to fees is borne by the users. 

Moreover, since transactions on the blockchain are by no means immediate, registration on one’s own database also solves the problem of speed, therefore, the performance of centralized exchanges, which are not only cheaper but also faster than decentralized ones. On the other hand, however, they also turn out to be custodians, and therefore with greater security risks.