The characterics of the all-optical orthogonal frequency division multiplexing (OFDM) generation based on a dual-arm Mach-Zehnder molulator (MZM) is investigated. It was found that the all optical OFDM subcarriers generation greatly depend on radio frequency (RF) and DC bias voltage of the dual-arm MZM. The system degradation induced by carrier fluctuation on the OFDM transmission performance was studied. A new parameter, namely carrier equalization was defined, and it can accurately describe the quality of the all-optical OFDM carrier generation. Different best working points have been selected to generate 2,3,4 and 5 orthogonal optical sidebands by adjust the parameters. At the receiver end, OFDM demodulation based on optical discrete Fourier transform was realized by using the Mach-Zehnder time delay interferometer and the optical gate. The bit error performance versus the phase of optical gate and bandwidth of optical filter was measured and at last, the performance of a 5×20 Gb/s transmission system based on all optical OFDM was studied.