Off-chain settlement is the completion of a transfer or obligation on a ledger or system that is not the public blockchain on which the stablecoin itself is issued.
A stablecoin payment provider, exchange, or custodian can update balances on its own internal ledger without broadcasting every transfer to the underlying blockchain. The provider can later settle net positions on-chain, through bank accounts, or through another payment system. Off-chain arrangements can reduce transaction fees and latency, but users depend on the intermediary's records, controls, and ability to honor withdrawals.
Off-chain settlement occurs on an intermediary or separate settlement system. On-chain settlement is reflected on the blockchain or distributed ledger that records the stablecoin transfer.
The settlement location affects transparency, counterparty exposure, transaction costs, and the extent to which users rely on an intermediary.
Two customers of the same exchange can transfer stablecoin value through the exchange's internal ledger without an immediate blockchain transaction.