Liquid Network: Everything to Know
By Beluga Research July 22, 2023
Summary
- The Liquid Network is designed to address some of the limitations of the Bitcoin blockchain
- It operates as a separate network, but is connected to Bitcoin, allowing for fast and confidential transactions
- Liquid Network supports the issuance of "liquid assets," which can represent real-world or digital assets such as cryptocurrencies, fiat currencies and tokenized securities
- The Liquid Network relies on the security of the Bitcoin blockchain, meaning that it can be subject to the limitations and potential vulnerabilities of Bitcoin
Overview
The Liquid Network supports the issuance of "liquid assets," which can represent real-world or digital assets such as cryptocurrencies, fiat currencies and tokenized securities. It is designed to address some of the limitations of the Bitcoin blockchain. While Bitcoin remains the king of cryptocurrencies, its underlying technology has certain inherent limitations, including long confirmation times and limited scalability.
The Liquid Network, launched in 2018, aims to alleviate these issues by providing a "federated sidechain" which is a faster and more efficient platform for transactions.
A Brief History
The development of the Liquid Network was spearheaded by Blockstream, a blockchain technology company known for its contributions to the Bitcoin ecosystem. Blockstream recognized the need for a solution that could enable faster, confidential transactions, particularly for businesses and financial institutions. With this vision in mind, the Liquid Network was created to complement the Bitcoin blockchain and offer a more versatile platform for digital asset transfers.
Getting Started
To get started with the Liquid Network, users need to have a Liquid wallet and obtain Liquid assets. Liquid assets are tokens issued on the Liquid Network representing various cryptocurrencies, such as bitcoin (L-BTC), tether (L-USDT) and others. These assets can be acquired through participating Liquid exchanges or by trading them with other network users.
Once a user has a Liquid wallet and some Liquid assets, they can start utilizing the network's features. The Liquid wallet allows users to send and receive Liquid assets, as well as perform other operations like asset issuance and atomic swaps. It provides a user-friendly interface to interact with the Liquid Network seamlessly.
Unique Aspects
One of the key unique aspects of the Liquid Network is its federated peg. Unlike traditional blockchains, where consensus is achieved through mining, the Liquid Network utilizes a federation of trusted functionaries to secure the network. These are reputable entities that operate the Liquid software and validate transactions on the network. The federation ensures the security and integrity of the Liquid Network while enabling faster transaction finality.
Confidential transactions are another noteworthy feature of the Liquid Network. While the Bitcoin blockchain is transparent, meaning that transaction details are visible to anyone, Liquid transactions are confidential by default. This is achieved by utilizing a technology called Confidential Transactions (CT), which encrypts the transaction amounts. Confidential transactions provide privacy for network participants, making it hard for external observers to link transactions to specific individuals or entities.
Liquid also supports the issuance of new assets on the network. This means users can create tokens and assets with specific properties and distribute them on the Liquid Network. Asset issuance on Liquid is relatively straightforward. This enables various use cases such as creating stablecoins, loyalty points or tokenized assets for trading.
The Liquid Network also offers fast and reliable transaction settlement. While the Bitcoin network operates with block times around ten minutes, the Liquid Network achieves block times of just one minute. This allows for quicker confirmation of transactions, making Liquid well-suited for applications that require faster settlement times, such as inter-exchange transfers and over-the-counter (OTC) trading.
Advantages
- Confidential Transactions (CT). The Liquid Network utilizes CT to enhance privacy. CT encrypts transaction amounts, ensuring only the parties involved in the transaction can view the details. This feature is particularly beneficial for businesses and individuals who value privacy in financial transactions.
- Faster Transactions. The Liquid Network offers faster transaction confirmation times compared to the Bitcoin blockchain. While Bitcoin transactions typically require an average of ten minutes for confirmation, Liquid transactions are usually confirmed within two minutes. This speed improvement makes the Liquid Network more suitable for applications that require near-instantaneous transaction settlement.
- Enhanced Scalability. The Liquid Network provides a solution to the scalability challenges faced by Bitcoin. By moving transactions to the Liquid sidechain, the main Bitcoin network is freed up, allowing for more efficient processing of transactions. This scalability improvement enables a higher volume of transactions to be processed without congesting the Bitcoin blockchain.
- Issued Assets. The Liquid Network allows users to create and transfer digital assets known as "Issued Assets." These assets can represent various forms of value, such as fiat currencies, tokenized securities, or even other cryptocurrencies.
- Atomic Swaps. The Liquid Network supports "atomic swaps," which are trustless and decentralized exchanges between different cryptocurrencies. Atomic swaps enable users to exchange assets across different blockchains, without the need for intermediaries or centralized exchanges.
Disadvantages
- Centralized Federation. The Liquid Network operates with a federated model, where a group of trusted entities known as functionaries is responsible for validating transactions and maintaining the network. This model introduces a level of centralization, as the functionaries play a crucial role in network governance.
- Limited Decentralization. As a sidechain solution, the Liquid Network relies on the security of the Bitcoin blockchain. This dependence on the Bitcoin network means that the Liquid Network's security is ultimately tied to the security of Bitcoin. While this provides a high level of security, it also means that the Liquid Network is subject to the limitations and potential vulnerabilities of the Bitcoin blockchain.
- Restricted Access. Participation in the Liquid Network is limited to entities that are approved as functionaries. This restriction on network access may limit the network's potential for widespread adoption and participation.
- Limited Smart Contract Functionality. The Liquid Network does not support the full range of smart contract capabilities found in platforms like Ethereum. While the Liquid Network does enable the creation and transfer of Issued Assets, it does not offer the same level of flexibility and programmability as more advanced smart contract platforms.
- Reliance on Blockstream. The development and maintenance of the Liquid Network are primarily driven by Blockstream, the company behind its creation. This reliance on a single entity raises concerns about centralization and the potential influence of a single organization on the network's direction and development. Critics argue that this reliance goes against the decentralized principles that support cryptocurrencies.