Blockstream’s Liquid Network: Bitcoin Sidechain Guide

liquid network guide

The scalability has always been an issue of distributed ledgers. The more people start to utilize blockchain and cryptocurrencies, the bigger becomes the problem. As time goes by, the brilliant crypto minds discover new solutions, so that the blockchain can keep moving forward and attracting more users. 

Vitalik Buterin, together with the Ethereum team, will introduce Ethereum 2.0 this year with enhanced features and advanced decentralized opportunities. EOS has been having sidechains (sister chains) since 2018. Bitcoin Cash, Tezos, and many other distributed ledgers manage to introduce their own approaches to the scalability problem. The most well-known blockchain, Bitcoin, has also required enhancement. And that is where the Liquid Network comes in.     

What are Sidechains?

In its core, a sidechain is a separate blockchain that is tied closely to the parental blockchain (in Liquid Network case to the Bitcoin blockchain). Sidechains are attached to the original blockchain in a two-pegged way. This enables the seamless interchangeability of digital assets between the two networks. 

The process of transferring funds between two blockchains (and vice versa) is as follows: 

A user sends some amount of coins to an output address – coins are locked (or frozen) – the transaction is completed – the confirmation is sent to all the chains – a waiting period (for security reasons) –  a user can utilize coins on the sidechain. 

sidechain

When speaking about sidechains, there is a federation component that provides extra security to transactions and guarantees the interchangeability. A federation is a group of nodes that operates as an extra layer between the main chain and a sidechain. 

What Is Liquid Network?

Liquid Network is a federated sidechain of Bitcoin that allows for faster transactions and enables the issuance of digital assets.  Blockstream introduced a Strong Federation concept in the Liquid project in 2017, declaring that:

A Strong Federation is a group that serves as a mutually-incentivized protocol adapter between an “anchor chain” and one of its sidechains and acts as a unit to ensure forward progress of the sidechain. Using cryptographic tools and secure hardware, the participants construct a Byzantine-robust smart contract wherein each “functionary” is economically incentivized to operate in the best interest of the network by the mutually agreed-upon rules.

As a sidechain is a separate entity, participants of the sidechain network are responsible for the security of the chain. A functionary performs two significant roles: a block signer and watchman. The first role obliged a functionary to keep an eye on block height. A federated structure of Liquid Network requires a block verification of two-thirds of all block signers. The watchman role makes a functionary manage and secure Bitcoin held by the federation. 

Note also, that when transferring funds to Liquidity Network, your BTC becomes L-BTC (Liquid Bitcoin). Essentially, L-BTCs are your BTC that can operate on Liquid Network, thereby, there are 1-to-1 pegged to the original Bitcoin (BTC)

The process of sending coins between the Bitcoin blockchain and the Liquid Network is called peg-in.

peg in

A Bitcoin user sends BTC to an output address – coins are locked and guarded by the federation or functionaries (this eliminates the chance of spending coins somewhere else)  – a waiting period that required 102 confirmations on the Bitcoin network – a user can utilize L-BTC on the Liquid Network.

The process of sending L-BTC to the parental chain is called peg-out. Liquid Network will release funds and send them right into your BTC wallet after two confirmations from the Liquid side. Depending on the network conditions, the process might take up to 40 minutes. 

Confidential Transactions

Transactions that took place on Liquid Network could be seen by anyone. However, the team behind the project introduced a confidential transaction (CT) feature. 

CT aims to provide more confidentiality to users by hiding the amount of a transaction from anyone who is not involved in transaction processing. According to official docs provided by Liquid, traders who don’t want to expose their strategies can use CT, so the transaction amount will not be reflected anywhere.

“…Use cases for this level of commercial transaction privacy will become more apparent as the cryptocurrency trading ecosystem matures, and larger market makers and financial institutions begin trading bitcoin across exchanges. They will want to move bitcoin between their accounts at different exchanges, without broadcasting the amounts to the general public, providing assurances that their trading strategies and holdings are not exploited by potential competitors.”

Issuance of Digital Assets

Liquid Network allows anybody who is into crypto to issue their own cryptocurrency. The platform enables the creation of digital collectibles, tokenized fiat, altcoins (a cryptocurrency that is not BTC), attested assets, and reward points. It is also possible to create a security token that represents a tradable financial instrument. Liquid provides the platform and tools for the creation, yet it is not responsible for the verification of a new asset.  

Liquid Network History and News

In 2014, the blockchain-oriented company, Blockstream published a whitepaper “Sidechain Elements,” explaining the affection of sidechain technology on blockchain development.   

At the end of 2015, Blockstream announced the Liquid project aimed at decreasing the time of transaction processing on crypto exchanges.

In January 2017, Blockstream published another whitepaper “Strong Federations: An Interoperable Blockchain Solution to Centralized Third Party Risks.”  

The Liquid beta was launched two years later and in 2018, Blockstream officially introduced Liquid Network. The sidechain solution was implemented into 23 leading cryptocurrency exchanges (as of 2018) including Bitfinex, Bitmax, OKCoin, and many others.  

In June 2019, Tether stablecoin was launched on the Liquid Network.

In November 2019, the leading cryptocurrency exchange Bitfinex moved $1.5 millions of USDT to the Bitcoin sidechain, Liquid Network. According to Bitfinex and Tether CTO, Paolo Ardoino, such an event had to provide traders with enhanced opportunities for atomic swaps and cross-exchange arbitrage.   

At the end of March 2020, Liquid Network welcomed ten new members to the Liquid Federation. 

As of March 2020, Liquid Network held more BTC than Lightning Network.

lightning and liquid
https://www.longhash.com/

Bottom Line

Liquid Network is a perfect solution to the scalability issue. It enables faster and private transactions and much lower commission fees. Enhancing the Bitcoin ecosystem, Liquid attracts bigger market players to the network, therefore, enlarging the number of end-users. 

To start using the Liquid Network, you might require some BTC. Changelly provides fast and instant access to 150+ cryptocurrencies. Buy BTC within minutes with a credit card (Visa, Mastercard), bank transfer, or ApplePay. 


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