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What is the Liquid Network?
Swen Keller
In the crypto world Swen has consistently found success through his effective communication skills and the unique ability to navigate the details.
The Liquid Network is a Bitcoin layer-2 sidechain that is built to carry out fast, confidential, and cheap transactions. It also enables the issuance of several digital assets, including stablecoins, security tokens, and more. It is linked to the primary Bitcoin blockchain and improves its functionality while maintaining the incredible security of the parent network.
What is the Liquid Network?
The Liquid Network is a sidechain of the main Bitcoin blockchain that aims to tackle a variety of problems without compromising on network security.
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What is the Liquid Network: An Overview
Launched in 2009, the Bitcoin blockchain marked a revolution in the world of fintech and has become a global phenomenon. As of right now, Bitcoin is the largest cryptocurrency blockchain, with a market capital of more than $660 billion. However, as is expected from the first generation of blockchain, the Bitcoin network has its limitations. These issues include prolonged transaction finality durations, the public nature of transaction records, and difficulty with network scalability.
The Liquid Network is a sidechain of the main Bitcoin blockchain that aims to tackle all the aforementioned problems without compromising on network security. Being a sidechain means that it is a separate blockchain with a significant level of independence but is still linked to the Bitcoin blockchain. The Liquid Network was launched in 2018 by Blockstream – a leading Bitcoin infrastructure company. Blockstream has also created several other Bitcoin-related services and products, such as the Lightning Network and the Elements blockchain platform.
How does the Liquid Network Work?
The underlying working model of the Liquid Network includes several significant elements.
Liquid Federation
Instead of using Bitcoin’s proof-of-work consensus mechanism, which not only requires expensive infrastructure but is also time-consuming, the Liquid Network created the Liquid Federation. This model comes at the expense of significantly reduced decentralization compared to the Bitcoin blockchain but enables much faster, cheaper, and more confidential transactions for its users.
The Liquid Federation is responsible for validating Liquid Network blocks, signing transactions, managing the Bitcoin peg, and governing the network. The Federation members are a group of crypto-native companies around the globe. These include exchanges, developers, and crypto-based service providers. The federation includes about 60 members.
Among the 60 Liquid members, 15 act as Liquid Functionaries. These are specialized servers at the heart of the network and take care of the management of new blocks and two-way Bitcoin peg on the network.
Liquid Bitcoin (L-BTC)
Liquid Bitcoin (L-BTC) is the native cryptocurrency of the Liquid Network. It is pegged to the Bitcoin token (BTC), as a result of which every individual L-BTC is backed by one BTC. Network participants can peg in and peg out Bitcoin to and from the Liquid Network whenever they need to. As a result, the Liquid network always has an equal amount of Liquid Bitcoin and Bitcoin tokens.
L-BTC is used to pay fees for sending and receiving payments, trade other digital assets, and lend and borrow funds on the Liquid Network. It can also be used to issue new digital assets on the network, like stablecoins or security tokens.
L-BTC Peg-In
L-BTC peg-in is a procedure through which Liquid users transfer their funds from the Bitcoin mainchain to the Liquid Network. To initiate the procedure, one has to send their BTC tokens to a special address controlled by the Liquid Federation members. Once the transfer is complete, the federation issues an equivalent amount of Liquid BTC tokens to the user. However, the transfer must have 102 Bitcoin confirmations before the L-BTC tokens can be claimed.
L-BTC Peg-Out
L-BTC peg-out is required in order to transfer funds from the Liquid Network to the Bitcoin blockchain. The procedure involves burning the L-BTC tokens, which is done by sending your holdings to an irretrievable burning address. Once your Liquid BTC tokens have been burned successfully, the federation releases an equivalent amount of BTC to your wallet on the mainchain. Liquid BTC pegging-out requires two separate confirmations.
Full Liquid Node
While new blocks are signed and validated by the Liquid Federation, anyone on the network can verify the validity of Liquid transactions and blocks by setting up a full node. A full node is a server participant that stores a full copy of the Liquid Network blockchain. Moreover, a full node can also carry out a confidential transaction and interact with digital assets issued on the blockchain. The nodes are connected to the Liquid Network via bridge nodes.
Benefits of Using the Liquid Network
The Liquid Network offers a range of benefits over the Bitcoin network for institutions, retail investors, and enterprise users.
1. Faster Transactions
Bitcoin mainchain suffers from awfully slow transaction speeds. The blockchain can barely process 7 transactions per second, and transaction finality can take up to a whopping 60 minutes to get fully validated. Compared to this, the Liquid Network can fully validate a transaction within 2 minutes. This speed is achieved by taking a shorter duration to complete a block and using the Liquid Federation model instead of the traditional PoW model.
2. Confidential Transactions
Even though Bitcoin’s transparency helps establish a trustless financial ecosystem, the public nature of the transaction ledger can cause problems for entities who wish to carry out large-scale over-the-counter (OTC) transactions. Revealing information such as the cryptocurrency and the amount being transferred puts parties involved at security risks. By implementing Confidential Transactions, the Liquid Network enables users to conceal critical information from the public eye. For instance, the public ledger may only reveal sending and receiving addresses, the time of the payment, and the transaction fee, while the rest of the information is recorded privately on the blockchain.
3. Asset Issuance
The Liquid Network also supports the issuance of new assets on top of the Bitcoin mainchain, which is completely impossible otherwise. These assets include stablecoins, security tokens, utility tokens, and other financial instruments. This makes Liquid Network a valuable platform for developing and deploying new financial products and services with optimal security. Users can also buy, send, exchange, lend, and burrow Liquid assets.
4. Lower Transaction Fees
The higher throughput and a comparatively centralized consensus procedure enable the Liquid Network to process transactions at significantly lower transaction fees. The Liquid blockchain doesn’t have to rely on miners who use expensive and complex computational devices to validate and record transactions.
Who Has Adopted the Liquid Network?
Several crypto-based companies and financial institutions have adopted the Liquid Network and are using it to send and receive payments.
Sideswap
Sideswap is a decentralized exchange (DEX) and crypto that allows its users to trade and exchange crypto assets on different blockchains via atomic swaps. Atomic swaps facilitate immediate crypto swaps without the need for any intermediaries. The platform also supports Liquid BTC swapping with other Liquid assets on the network.
Hodl Hodl
Hodl Hodl is a non-custodial platform that enables peer-to-peer Bitcoin trading. It also allows users to lend and borrow BTC and other BTC-based crypto assets. The platform uses multi-sig escrow smart contracts to ensure the security of funds. Hodl Hodl allows users to earn interest on their L-BTC holdings by lending it.
Raretoshi
Raretoshi is an NFT marketplace built on the Liquid Network. It facilitates the creation, purchasing, and selling of unique digital collectibles. Artists can easily create non-fungible token (NFT) assets for their art pieces using L-BTC. Similarly, users can buy and sell these tokens after depositing L-BTC in their Raretoshi wallets.
Conclusion
Undoubtedly, Bitcoin has proven itself as a strong contender for one of the world’s most popular store-for-value assets in the long run. However, multiple factors limit the functionality of the Bitcoin ecosystem for institutions, developers, and individual users who wish to perform efficient tasks using its blockchain platform. Bitcoin layer-2 solutions like the Liquid Network offer promising scaling solutions to most of these problems at a cheap cost. On top of that, the platform also helps in eradicating the privacy concerns of the users. The network still has many developments ongoing, but it is already being used for a variety of purposes, including trading, payments, asset issuance, gaming, and supply chain management.
FAQ
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In order to improve the slow and inefficient transaction procedure, the Liquid Network depends on centralized middlepersons and custodians. These include crypto-native institutions from around the world.
Created by Blockstream, the Liquid Network is governed by a federation of financial firms called the Liquid Federation and is operated on Elements, an open-source blockchain platform.
Although Liquid and Lightning are both Bitcoin layer-2 sidechains, they have several differences in their underlying framework. The former is built to facilitate large transactions, while the latter is more directed toward micro to small transaction amounts.
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