Liquid Network: A parallel network that runs as a sidechain of Bitcoin enabling fast and confidential transactions of large amounts of cryptocurrency.
Along with the Lightning Network, Blockstream’s Liquid Network is designed to solve the Bitcoin scalability problem.
The Liquid Network was launched recently by the developers behind the Lightning Network – the Blockstream. Liquid is a federated sidechain of Bitcoin. According to Blockstream, the sidechain is a private blockchain that runs parallel to the Bitcoin blockchain, enabling the deployment of new features and capabilities while leveraging bitcoin’s security. It enables the rapid, confidential, and secure transfer of funds between the participants in the network. The Liquid Network is highly useful because using Bitcoin, the on-chain network transaction is finalized relatively slowly. The technology offers an innovative solution to solve the Bitcoin speed issue.
Liquid produces its own blocks on the sidechain that’s tied to the main Bitcoin chain but not on it directly. Their assets are pegged to the real Bitcoin, and called L-BTC. It is created by the real Bitcoin being pegged and frozen on the Liquid sidechain within a transaction. L-BTC can be transacted much faster. Unlike Bitcoin, which has 10 minutes for a block creation, the Liquid Network offers a speed of 1 minute per block. L-BTC are signed by authorized nodes instead of mining with Proof-of-Work.
The Liquid Network is not as decentralized as Bitcoin, but it is designed to be spread out across parties, geography, and political jurisdiction to make it resistant to centralize control. Nodes are operated by independent entities, each of them can only control one node. Updating or adding entities need to have consensus from participants first before it happens. The most important is Blockstream can’t control the network by itself, so Liquid can exist without the company.
Exchanges participate and handle most of the processes. They send Bitcoin on behalf of customers through the Liquid Network. The solution was mainly made for exchanges, brokers, and market makers, like big financial institutions in the crypto industry. The technology will allow them to make almost instant transfers. Liquid is particularly useful for large transactions as it doesn’t have the limitation of payment channel capacity.
The network gives a great option for arbitrage and confidential transactions. Every participant of the network can see the transactions. Confidential transaction hides the amount sent from everyone except the participants of the transaction. This prevents front-running via blockchain analysis. It doesn’t allow to benefit from placing large orders beforehand. The technology is to be a new solution to compliance and privacy. Other tokenized assets can be issued on the network as well.
If the Lightning Network, also developed by Blockstream, is often compared to Visa use case, Liquid resembles SWIFT. The success of the network mainly depends on customer adoption.