Samson Mow, chief strategy officer at Blockstream, announced today that the blockchain startup has launched the Liquid Network, a Bitcoin sidechain.
Liquid is, as described by the company, “an innovative sidechain built on the Bitcoin network, facilitating faster bitcoin transactions between businesses and individuals, while enabling extended functionality.” The main purpose for the technology is faster settlements, improved transaction confidentiality, and tokenization for various assets.
As CCN reported, a sidechain acts as a second data layer over the Bitcoin blockchain. It keeps the latest ledger as a carbon copy, but transactions that occur on the sidechain don’t need to be included in the main blockchain’s blocks. This means that no network fees are incurred, and the blockchain’s blocks are not filled up with the sidechain’s records. The word “pegged” means that the blockchain for the sidechain match Bitcoin’s. Liquid’s “two-way peg” implies that its native asset can be swapped back and forth to Bitcoin (i.e., put on-chain) seamlessly.
Federated Sidechains and Centralization Concerns
The Liquid Network uses a native asset, called Liquid Bitcoin (L-BTC). L-BTC acts as a two-way peg to BTC, which can be redeemed through the network at any time. This native settlement asset allows for improved privacy and speed, according to Mow.
According to Blockstream, the Liquid Network will rely on hardware and software run by cryptocurrency industry businesses:
“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.”
However, as exchanges gain the easier transfer of BTC value, it comes at the cost to miners, who would not get to tap the mining reward. Miners would only benefit if the L-BTC was swapped for real BTC.
Additionally, Liquid is a network that relies on “trusted functionaries” composed of a “consensus of participants.” Blockstream admits that “it will never be as decentralized as Bitcoin.” Though Mow states that no single party, nor Blockstream, will have control over the Liquid Network, and no participant is in control of more than one Liquid functionary server, it remains to be seen how this plays out in practice, given the drama from EOS and other more centralized networks, as CCN reported.
Liquid and Lightning: What’s the Difference?
While Liquid’s features bear similarities to what the Lightning Network already does or promises to do, it serves a much different purpose. The Lightning Network is built for micro-payments that can be settling fast and nearly free, and it currently has a low maximum channel capacity to minimize the risk to users.
The Liquid Network, however, clearly targets large financial institutions and exchanges, which will be dealing with large transactions and high volumes. The fast settlements and cheap transactions first deployed by the LN can now be had for much greater amounts, albeit with Liquid’s native L-BTC asset.
Blockstream first made headlines in 2015 for announcing Liquid, the first sidechain of Bitcoin. The company then secured $55 million in series A funding in 2016 for its work in adding sidechains to the flagship cryptocurrency’s network. The public launch comes a bit behind schedule, which had previously been set for Q1 2018.