What is Liquid?
Learn about the Liquid Network and its role in the Bitcoin ecosystem
Introduction to Liquid Network
The Liquid Network is a sidechain-based settlement network for traders and exchanges, enabling faster, more confidential Bitcoin transactions and the issuance of digital assets.
Launched in 2018 by Blockstream, Liquid was designed to address specific limitations of the Bitcoin network—particularly for exchanges, traders, and financial institutions—while maintaining strong security guarantees through a federation of trusted entities.
Unlike Bitcoin's proof-of-work consensus mechanism, Liquid uses a federation of trusted participants who collectively manage the network, allowing for faster settlement times and enhanced privacy features not available on the main Bitcoin blockchain.
Relationship with Bitcoin
The Liquid Network is built as a Bitcoin sidechain, meaning it's a separate blockchain that runs in parallel and is connected to the Bitcoin blockchain. Here's how they relate:
- Two-way peg with Bitcoin, allowing BTC to move between chains
- Uses a different consensus model optimized for speed and privacy
- Extends Bitcoin's functionality while inheriting its security model
- Maintains 1:1 backing of Liquid Bitcoin (L-BTC) with real BTC
A Note from Satoshi
Technical Foundation
Sidechain
A blockchain that runs in parallel to Bitcoin. Liquid uses a two-way peg system that allows Bitcoin to be transferred between the main chain and Liquid, enabling new features while maintaining the security of assets.
Federated Consensus
Unlike Bitcoin's proof-of-work, Liquid uses a federation of functionaries who jointly control the two-way peg and secure the network. This allows for faster block times (1 minute) and predictable settlement.
Confidential Transactions
Liquid implements Confidential Transactions to hide transaction amounts and asset types from third parties, enhancing privacy while maintaining verifiability. Only the transaction participants can see the full details.
Asset Issuance
Liquid allows the issuance of custom assets, representing real-world assets, security tokens, stablecoins, or utility tokens. Each asset has a unique ID and can be transferred just like L-BTC.
Key Features
1Fast Settlement
Liquid blocks are produced every minute and typically confirm within seconds, making it significantly faster than Bitcoin's 10-minute block time. This makes Liquid ideal for traders who need to move funds quickly between exchanges to take advantage of arbitrage opportunities.
2Enhanced Privacy
Confidential Transactions in Liquid hide transaction amounts and asset types from public view, providing significantly more privacy than Bitcoin's transparent blockchain. This privacy is important for businesses and individuals who don't want their financial activities publicly visible.
3Asset Issuance
Liquid allows the issuance of digital assets that can represent various instruments like security tokens, stablecoins, or utility tokens. These assets inherit Liquid's privacy and speed benefits. Each Liquid asset is uniquely identifiable and can be verifiably linked to an issuer.
4Federated Security
Liquid's federation consists of cryptocurrency businesses like exchanges, trading desks, and financial institutions. The federation secures the network through a threshold signature scheme that requires a supermajority of functionaries to agree on actions, providing protection against individual compromises.
5Bitcoin Compatibility
Liquid is based on the Bitcoin codebase and uses many of the same components, making it familiar for Bitcoin developers. The two-way peg ensures that L-BTC is always backed 1:1 by BTC, allowing users to convert between the two when needed, though the peg-in and peg-out processes have different security assumptions.
Use Cases
Exchange Integration
Exchanges can use Liquid to facilitate faster deposits and withdrawals, reducing counterparty risk and improving capital efficiency. Users can move funds between exchanges in minutes instead of waiting for multiple Bitcoin confirmations.
Token Issuance
Companies can issue digital assets on Liquid for various purposes, including representing securities, stablecoins, or utility tokens. These assets benefit from Liquid's confidentiality features and can be traded on supporting platforms.
Confidential Transactions
Users who need enhanced privacy for their Bitcoin transactions can use Liquid to hide transaction amounts and asset types, providing greater financial privacy than is possible on the main Bitcoin blockchain.
Trading and Arbitrage
Traders can leverage Liquid's fast settlement times to quickly move funds between exchanges, capturing arbitrage opportunities that would be impractical using on-chain Bitcoin transactions due to confirmation times.
Tradeoffs
While Liquid offers significant advantages, it's important to understand the tradeoffs compared to Bitcoin:
Trust Model
Liquid relies on a federation of trusted parties, whereas Bitcoin is trustless. Users must trust that a supermajority of the federation will act honestly.
Centralization
The federation represents a more centralized approach than Bitcoin's open mining, though the threshold signature scheme mitigates some risks.
Peg Security
The two-way peg relies on the federation's honesty for peg-outs back to Bitcoin, creating a potential security bottleneck.
Complexity
Liquid introduces additional complexity compared to Bitcoin, with more moving parts and potential points of failure.