What is Liquid Network: A Sidechain Streamlining Bitcoin Transactions
Bitcoin, the OG crypto, is sturdy and secure. But it is precisely because of these features that it is also not as fast and scalable as some of the newer blockchains, such as Ethereum and Solana–BTC’s robust security comes at the cost of slow transaction speeds, hindering everyday use.
In response, there has been much innovation around Layer 2 solutions such as the Liquid Network. In this article, we explain what it is, how it works, and the benefits it offers to users as one of the most exciting BTC Layer 2 solutions to watch.
Birth of a Sidechain
Developed by Blockstream in 2018, the Liquid Network is a Bitcoin layer-2 solution designed to enable efficient issuance and settlement of tokens such as stablecoins and other financial instruments on the Bitcoin blockchain. In other words, it aims to be the DeFi layer of Bitcoin.
According to its website, it is governed by a “federation of parties” which includes exchanges, financial institutions, and other Bitcoin-focused companies, and operated on an open-source blockchain platform called Elements.
How Liquid Network Works
Liquid uses what is called L-BTC, or Liquid Bitcoin, to perform transactions. L-BTC is essentially Bitcoin that has been “wrapped” for use on the Liquid Network. It’s a digital representation of regular Bitcoin (BTC) on the main Bitcoin blockchain.
Once a user has transferred bitcoin to Liquid, they can take advantage of the network’s speed and confidentiality features when making transactions. Users can also issue new assets on the network such as stablecoins and security tokens.
Here’s an analogy: Imagine L-BTC as carnival tokens. You exchange your regular cash (BTC) for chips (L-BTC) to use within the carnival (Liquid Network) for the rides. When you’re done, you can exchange your chips back for cash at the same rate (1:1 peg).
Benefits of L-BTC:
- Faster transactions: Transactions on Liquid are confirmed in minutes compared to Bitcoin’s ten-minute block times. In fact, Bitcoin moved to the Liquid sidechain can achieve final settlement within two minutes.This efficiency makes it ideal for quicker payments and real-time applications.
- Enhanced privacy: Unlike Bitcoin’s transparent ledger, Liquid offers optional confidentiality. Users can choose to obscure transaction amounts and asset types, enhancing privacy.
- Enhanced security: While operating independently, Liquid leverages a federated peg system. A consortium of trusted entities, like exchanges and custodians, validates transactions, ensuring the system remains anchored to Bitcoin’s security.
- Asset issuance: Liquid allows for the creation and management of new digital assets on its platform. This opens doors for security tokens, stablecoins, and other financial instruments.
- Fungibility: All L-BTC are created equal and backed by the same amount of BTC, ensuring they can be freely used within the Liquid Network.
In essence, L-BTC allows users to leverage the security of Bitcoin with the benefits of faster transactions and optional privacy offered by the Liquid Network.
Liquid Network Growth and the Road Ahead
Since its launch in 2018, Liquid has seen steady growth. Major exchanges and institutions utilize it for its fast and private transactions. The ability to issue new assets further expands its potential in the burgeoning DeFi (Decentralized Finance) space.
While specific user numbers are not readily available, the addition of new members to the Liquid Federation, like Bitmatrix and GMO Coin in early 2022, signifies continuous growth and integration within the cryptocurrency ecosystem. Liquid is also exploring greater interoperability with other blockchains, allowing for easier transfer of assets between different networks.
How to Use Liquid Network
There are two main ways to interact with the Liquid Network:
- Using a Liquid Wallet:
This is the simplest option for most users. Several wallets support Liquid Bitcoin (L-BTC) transactions, including Blockstream Green (Blockstream Green wallet). These wallets handle the complexities of interacting with the Liquid sidechain for you. Here’s what you’ll need:
- Download a Liquid-compatible wallet: Choose a reputable wallet that supports L-BTC.
- Create a Liquid Address: The wallet will generate a unique address for receiving L-BTC.
2. Running a Liquid Node:
This option offers more control and functionality but requires technical expertise. Here’s what’s involved:
- Download Elements Core: Elements Core is the software that allows you to run a Liquid node.
- Technical Setup: The setup process involves downloading the software, configuring it for the Liquid network, and syncing the blockchain data. This can be complex for non-technical users.
- Benefits: Running a node allows you to:
- Send and receive L-BTC and other assets on the Liquid Network.
- Verify transactions for yourself.
- Issue your own assets on the Liquid Network (advanced users).
Additional Considerations:
- Obtaining L-BTC: You’ll need to acquire L-BTC to use the network. This can be done through:
- Exchanges: Some cryptocurrency exchanges allow buying and selling L-BTC.
- Peg-in Services: Services like Sideswap allow users to “peg-in” regular Bitcoin (BTC) to the Liquid sidechain in exchange for L-BTC.
Important: Regardless of the method you choose, it’s crucial to research and understand the risks involved before using the Liquid Network. Since it’s a sidechain, security relies on a federated peg system, which introduces different risks compared to the main Bitcoin network.
In Conclusion
Looking ahead, Liquid’s success will hinge on its ability to balance speed, privacy, and security. As the Bitcoin ecosystem evolves, Liquid’s role as a reliable sidechain could become even more crucial in scaling Bitcoin for mass adoption.
