The Liquid Network has been a hot topic in the blockchain industry recently, but most people are still confused on what the Liquid Network is and how it works. We’re here to shed the light for you and make it easy to understand what the Liquid Network is about and how you can get started with it.
- Blockstream was founded in 2014 and made headlines after announcing the Liquid Network.
- After a year of beta testing on the Bitcoin blockchain network, the Liquid blockchain went live on September 27, 2018
- Today, a significant portion of Bitcoin block space is taken up by users doing nothing more than sending money from one exchange to another and back and forth.
- Within the Liquid Network, in place of miners, a group of block signers collect transactions and group them into blocks, then sign them and broadcast them throughout the network.
- Liquid’s full node allows any user to join the Liquid Network and operate a full node in order to trustlessly self-validate the chain, just like they could with the Bitcoin network.
- Blockstream released a new block explorer, https://blockstream.info/, which allows users to search and view specific data that is published in real-time to the Bitcoin blockchain and the Liquid sidechain.
- If you are a trader or individual user, the best way to go about entering the network is by visiting a participating exchange and purchasing L-BTC.
- Soon, we should see Liquid related releases from GreenAddress for GUI wallet support, and hardware wallet support for Liquid Assets from Trezor and Ledger.
What’s Liquid and why do we need it?
Blockstream was founded in 2014 and made headlines after announcing the Liquid Network. The sidechain project secured $21 million in the seed round, followed by $55 million in Series A funding.
Initially devised by Blockstream developers in 2014 and published in a white paper named, “Enabling Blockchain Innovations with Pegged Sidechains,” it was eventually launched by Samson Mow and Joseph Weinberg in 2017.
After a year of beta testing on the Bitcoin blockchain network, the Liquid blockchain went live on September 27, 2018 at 1:29 UTC. 23 of the cryptocurrency industry’s biggest players participated in the launch as Liquid members, including Altonomy, Atlantic Financial, Bitbank, Bitfinex, Bitmax, BitMEX, Bitso, BTCBOX, BTSE, Buull Exchange, DGroup, Coinone, Crypto Garage, GOPAX (operated by Streami), Korbit, L2B Global, OKCoin, The Rock Trading, SIX Digital Exchange, Unocoin, Xapo, XBTO, and Zaif.
Today, a significant portion of Bitcoin block space is taken up by users doing nothing more than sending money from one exchange to another and back and forth.
In addition, money is lost or prevented from being fully utilized due to the extended amount of time required to fully confirm Bitcoin deposits and withdrawals between exchanges and financial institutions.
In response to the difficulties, professional traders have grown accustomed to splitting funds between many different exchanges to take advantage of arbitrage opportunities and protect against hacks or service interruptions.
Even regular users often send Bitcoin back and forth to trade in the different digital assets listed on individual exchanges or distribute their funds.
Exchanges can batch some of the transactions; however, they still end up creating a lot of transactions and UTXOs to move money from one entity to the other.
Liquid is a federated sidechain built on the Bitcoin network to facilitate faster bitcoin transactions between businesses and individuals.
Liquid is intended for cryptocurrency exchanges, financial institutions, large traders, and OTC desks, while smaller traders and end users can still use Liquid through Liquid wallets and member exchanges.
How does Liquid work?
A sidechain can be defined as “…a separate blockchain that is attached to the parent through the use of a two-way peg which allows for assets to be interchangeable and moved across the chain at a fixed deterministic exchange rate;” this allows it to operate independently of the primary blockchain and use its own block verification mechanism.
Within the Liquid Network, in place of miners, a group of block signers collect transactions and group them into blocks, then sign them and broadcast them throughout the network.
Because Liquid’s primary application is for exchange settlement, block signers are generally exchanges, market makers, and large-scale traders. Traditional users can still run full nodes and verify blocks and transactions.
Generally, users can use the network in the same way as they would use Bitcoin, with wallets, block explorers, and keys, all functioning similarly.
Due to its organization as a Federated blockchain, block time is only a minute, and full confirmation occurs in two blocks, which is leagues ahead of Bitcoin’s 10 minute block time and the six block confirmations many organizations require for larger value transactions.
Take a look at the photo below:
The Liquid Network’s native digital currency is called L-BTC.
The Liquid Bitcoin (L-BTC) asset is backed by a two-way peg to Bitcoin (BTC) and can be redeemed at any time.
Liquid also supports other assets. To further clarify, the Bitcoin network has one asset type, Bitcoin, while the Liquid Network has Liquid Bitcoin, which is transferred in from Bitcoin and can be sent back to Bitcoin at any time, but it also has assets that people can issue, which are more similar to the assets in other systems, like ERC 20 tokens.
Assets that people can issue could represent a gold storage token, like a gold ETF for physical gold certificate, or other kinds of attested assets or shares in a company.
All of the transactions on liquid are confidential by default and even the type of asset is encrypted. When you look at a transaction in a liquid block explorer you won’t be able to see the asset types or amount transferred.
Nevertheless, due to advanced cryptographic proofs, the chain remains publicly auditable and a unique view key is available, which allows you to share transaction information with necessary parties (accountants, etc.), while still preventing them from spending your funds.
What tools are available to help me get started using Liquid?
On November 6th, the Liquid full node binaries and source code was released. This allows any user to join the Liquid Network and operate a full node in order to trustlessly self-validate the chain, just like they could with the Bitcoin network. Included in the release are the liquidd Liquid daemon, liquid-cli command-line utility, and wallet support that enables users to manage L-BTC and other Liquid Assets.
With liquid-cli, users can Issue Assets, send and receive Liquid Issued Assets, send and receive Liquid BTC (L-BTC), and display various information on the state of the Liquid chain.
Also recently, Blockstream released a new block explorer, https://blockstream.info/, which allows users to search and view specific data that is published in real-time to the Bitcoin blockchain and the Liquid sidechain.
How should I use Liquid?
If you are an exchange or other financial institution that would like to join the network as a block signer, you can contact Blockstream here: https://blockstream.com/contact/.
In order to become a block signer, otherwise known as a functionary, you need both physical hardware and an advanced security infrastructure. As part of the process, a block signer will receive a box with some software and hardware that has cryptographic keys in the hardware module.
The functionary would power up the box on a network in a secured location, similar to one where they would traditionally store exchange hot wallets.
Joining the network is primarily for those who hold a lot of client funds or investor funds and feel they have a secure data center, qualified security staff, and believe that the other participants or at least ⅔ of them possess comparable measures.
A ⅔ consensus is required to move Bitcoin that are held in the multisig wallets used to ensure a complete 1–1 peg between Bitcoin and L-BTC; therefore, the system relies on a fair amount of trust.
Becoming a functionary allows you to feel more confident about the entire network’s security and act as a good citizen by increasing its strength while you rely on the network for its benefits to you and your clients.
If you are a trader or individual user, the best way to go about entering the network is by visiting a participating exchange and purchasing L-BTC. Once you have Liquid Bitcoin, you can download the client and transfer the funds to your personal wallet, to others who have installed the wallet, or to participating exchanges.
The L-BTC address is similar to a Bitcoin address but begins with the letters CT. Ultimately, most users may never have to directly access the Liquid Network, as exchanges will handle everything behind the scenes.
In order to quickly move Bitcoin, you would just request a deposit address from the destination exchange, 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 two confirmations (just two minutes) and credit your account with traditional BTC.
On October 25th, The Rock Trading announced its users could deposit and withdraw Bitcoin using the Liquid sidechain. At this time, only The Rock Trading is live, but more exchanges are promised soon.
Final thoughts on using the Liquid Network today
As of today, due to the lack of a GUI client or hardware wallet and only one active exchange, most everyday Bitcoin enthusiasts should either open an account with The Rock Trading and download the command line client to utilize Liquid Bitcoin, or just wait a couple months until all of the participating exchanges have fully implemented the network and an easy-to-use GUI wallet is released.
Soon, we should see Liquid related releases from GreenAddress for GUI wallet support, and hardware wallet support for Liquid Assets from Trezor and Ledger. Furthermore, the eventual addition of digital assets on the Liquid Network pegged to fiat currencies, and Liquid’s implementation on numerous exchanges, will allow professional and amateur traders to transfer funds within two minutes, take advantage of arbitrage opportunities, and hold their funds in personal wallets, while still benefiting from having them readily available. Algorithmic traders will most likely be the first to benefit from Liquid, due their use of API’s for trading, which have already been released.
All that is required now, is a few more exchanges to come online and they will be able to reap the benefits of expedited confirmation times and enhanced security.