The Liquid Network is now live, allowing fast, secure transactions without the encumbrances of the main Bitcoin blockchain. In a blog post announcing the launch, Blockstream, one of Bitcoin’s leading development companies, declared that the new sidechain would facilitate transactions between “exchanges, brokers, market makers, and financial institutions around the world.”
In addition to faster, more secure transactions, Blockstream says that the Liquid Network will allow “Issued Assets” with ERC-20 like properties, allowing exchanges of tokenized fiat or other assets.
But before you dive into the Liquid Network with your life savings, it’s important to understand what it is—and isn’t.
A Side-Eye at Side Chains
In short, a sidechain is a private blockchain between a small federation of Bitcoin nodes. Since it’s based on a smaller network, side chains allow faster, more secure transactions without the burden of mining.
Instead of a trustless network, Liquid is maintained “by a Strong Federation of trusted functionaries,” Blockstream says in its Frequently Asked Questions. “This allows transaction on Liquid to reach a state of finality faster and more reliably than those on the Bitcoin blockchain.”
We’ve previously covered Rootstock, a Bitcoin sidechain with a built-in Turing-Complete Virtual Machine. Although the regular rules of the Bitcoin network do not allow for complex smart contracts, Rootstock allows users to skirt those limitations by exchanging regular bitcoins for SBTC and using them to interact in RSK’s Ethereum-like smart contracts. When the interaction is concluded, SBTC tokens can be traded back for bitcoins on the regular blockchain.
The Liquid Network does not allow smart contracts, but it does have other benefits like one-minute blocks and advanced privacy. It’s a bit like the Lightning Network, except instead of being geared towards micropayments among thousands of users, Liquid is aimed at improving the payments between high-volume players. In addition to faster transactions, it also includes the possibility of Confidential Transactions and private solvency proofs.
Getting Your Feet Wet
But don’t get too excited about mining Liquid Bitcoins. There’s no proof-of-work on the Liquid Network—and in any case, it’s currently restricted to 23 nodes, maintained by major exchanges like Bitfinex, BitMEX, and OKCoin. Participation is currently free, but it will move to a monthly subscription model after beta testing.
That means that most of us won’t touch the new network, at least not directly. Instead, the Exchanges will do the heavy lifting on our behalf. “Exchanges that are members of the Liquid Network have the ability to send bitcoins to other participating exchanges through the Liquid Network,” Blockstream explains in the Liquid Network FAQ, before continuing:
First a customer would request a deposit address from the destination exchange.…The end user would then take this address to the source exchange and request a withdrawal from that exchange and enter the destination address. The source exchange would then send bitcoins through the Liquid Network to the other exchange who would wait for confirmations of the deposit and credit your account. Users never need to directly access the Liquid Network or hold bitcoins on the Liquid Network – exchanges will do this for you.
That’s not likely to satisfy the most hardened Nakomoto purists, and Blockstream admitted as much. “Liquid is a federated sidechain, so it will never be as decentralized as Bitcoin,” the company writes, but “No single party, including Blockstream, can control the Liquid network.”
That’s not going to be much good for decentralized or peer-to-peer payments. But for the hedge funds and high-volume traders who make their bread from price differences between multiple exchanges, the ability to securely transmit value without waiting for six confirmations is likely to make the Bit-economy a little bit faster.
The author has investments in Bitcoin.