Liquid is an implementation of a federated sidechain - a private blockchain with different features, capabilities, and benefits than the main Bitcoin blockchain.
The Liquid Network was built specifically to address the particular needs of exchanges and enables the rapid, confidential and secure transfer of funds between participants, providing a solution to the inherent problem of delayed transaction finality on the Bitcoin network.
Liquid’s sidechain is built on top of the Elements code-base and uses Blockstream’s Strong Federation technology to support the 1-to-1 exchange of bitcoin between chains.
Liquid achieves all of these benefits while providing users with the security of trading real, verifiable bitcoin-backed assets. All Liquid users can ensure that the amount of bitcoins inside of the Liquid Network is identical to the amount of bitcoins frozen in the main chain.
Exchanges that are members of the Liquid Network have the ability to send bitcoins to other participating exchanges through the Liquid Network. They can then do this on behalf of customers to send money between different exchanges. First a customer would request a deposit address from the destination exchange. This address would be similar to a Bitcoin address but begin with the letters CT. 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.
Liquid benefits participating Bitcoin exchanges and Bitcoin businesses, as well as their customers.
The participating exchanges and Bitcoin businesses deploy the software and hardware that make up the Liquid network, so that they can peg in and out of the Bitcoin blockchain and offer Liquid’s features to their traders. Liquid provides a more secure and efficient system for exchange-side bitcoin to move across the network.
End users benefit from the greater liquidity Liquid enables between exchanges.
The Bitcoin blockchain excels at offering the permissionless, trustless, and censorship resistant transfer of value. However, achieving those means comes at the expense of a deterministic transaction flow and expense of mining. A sidechain allows a different set of trade-offs that allow privacy and rapid finality of asset transfer at the expense of being a permissioned network and trust of the functionaries.
Extending the Bitcoin protocol using a sidechain allows the main chain itself to remain secure, specialized and robust whilst its underlying properties underpin the smooth operation of the sidechain.
Whereas Bitcoin is secured by Proof of Work, assets on the Liquid blockchain are secured by a Strong Federation of trusted functionaries. This allows transaction on Liquid to reach a state of finality faster and more reliably than those on the Bitcoin blockchain.
The Liquid sidechain is purpose-built to cater for the needs of exchanges, brokers and traders, enabling the rapid, secure and confidential transfers of large amounts of bitcoin between participants. The use of a blockchain allows for transfers to be made that are not bound by such things as a single user’s channel capacity. Transaction finality is assured once a transaction is included within a block and there is no risk of chain reorganization due to the process of Strong Federation block signing. Transactions are therefore not subject to delay due to the lack of cooperation of other parties. Funds in the sidechain can be increased by member exchanges pegging more bitcoin into the sidechain.
The Lightning Network is designed to enable the near-instant transfer of small or micro value payments between linked channel members and merchants. Transactions are limited in amount to channel capacity, specifically the capacity of the smallest channel in the ‘hops’ from sender to receiver. This means that there are cases where you may wish to send bitcoin through Lightning and a new channel would need to be created. This would require a new on-chain transaction in the Bitcoin network. To reduce the risk of monetary losses, the current maximum channel capacity is currently limited by the protocol to around 0.168 BTC. Transfers on the Lightning Network can also experience delays if a payment must route through parties that are not on-line, resulting in the potential need to open a new channel in order to route around them.
Liquid is a federated sidechain, so it will never be as decentralized as Bitcoin. However, Liquid is designed to remove control from any single party, geographic location, or political jurisdiction. The Liquid Network is operated by functionary servers, each securely hosted by geographically dispersed, independently owned and operated Bitcoin exchanges.
Updates are deployed by consensus of participants within the network. No single party, including Blockstream, can control the Liquid network, and furthermore, no single entity is in control of more than a single Liquid functionary server.
Liquid is designed to enable auditing and openness to any network participant, as well as confidentiality between transacting parties. Like Bitcoin, Liquid transactions are viewable by everyone in the network, so Confidential Transactions hides transaction amounts from everyone except for the parties directly involved in the transaction itself. In doing so, it minimizes front-running risks that occur through blockchain analysis.
Confidential Transactions fundamentally provide privacy for any end user that requires it, regardless of reason. An example use case 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 adversaries.
Private solvency proofs are also possible using Confidential Transactions in that you do not need to show the full amount held but instead that a threshold is met in order to prove reserves are adequate. For example: you can show that your user account balances sum up to the total assets held without showing individual amounts or even what that sum is. You do not even need to reveal the total number of users.
Liquid makes compliance easy, whilst providing privacy of transactions. Something that would not be possible without the use of Confidential Transactions.
Liquid was built using the Elements blockchain platform and therefore has multi-asset issuance capabilities built in through the Confidential Assets feature. In its first release, Liquid will support Bitcoin only. Future versions of Liquid may support other assets, such as other cryptocurrencies or assets issued by participants.
Access to Liquid beta is free. There is no requirement for beta participants to move forward with a commercial contract. If you’re interested in getting early access to Liquid, request to join the beta program. Once the Liquid Network goes live, there is a monthly subscription fee.
The network is live as of September 27, 2018.