The Liquid Network-Bitcoin’s solution for Exchanges

The Lightning Network is a much hyped bitcoin scaling solution however many don’t realize/heard about the other scaling solution supported by the Bitcoin community.
Other than Lightning Network, Side Chains are another hyped solution to bitcoin scaling woes.

You might be asking what is the world is a side chain. A sidechain is a separate chain that connected to the main chain by a type of pegging. Sidechains can introduces new tech to the coin without affecting the main chain.

This is useful for bitcoin which has gotten too large to introduce new tech without massive consensus. That is the reason bitcoin goes through softfork not like hard fork upgrades like other coins do(Monero and Eth).

Liquid is an implementation of a federated sidechain – a private blockchain with different features, capabilities, and benefits than the main Bitcoin blockchain.

The Liquid Network was built specifically to address the particular needs of exchanges and enables the rapid, confidential and secure transfer of funds between participants, providing a solution to the inherent problem of delayed transaction finality on the Bitcoin network.

Basically liquid is a way for exchanges to send bitcoin/assets to other exchanges(most transaction in Bitcoin are from one exchange to another).

This would make blocks in the main chain smaller/ less clogged letting more actually user to user transactions to happen or to let LN opening and closing transactions to be cheaper 😉

The Liquid Network uses bitcoin as its currency. It create a token backed by 1 on 1 to bitcoin and is used by the Liquid Network. So not fake bitcoins/own token.

So how does Liquid Network work?

The Liquid sidechain is purpose-built to cater for the needs of exchanges, brokers and traders, enabling the rapid, secure and confidential transfers of large amounts of bitcoin between participants. The use of a blockchain allows for transfers to be made that are not bound by such things as a single user’s channel capacity. Transaction finality is assured once a transaction is included within a block and there is no risk of chain reorganization due to the process of Strong Federation block signing. Transactions are therefore not subject to delay due to the lack of cooperation of other parties. Funds in the sidechain can be increased by member exchanges pegging more bitcoin into the sidechain.

In short:
Liquid is basically a Dash federated distributed servers aka masternodes, compromising complete distribution for better efficiency, which is fine since it’s pegged to Bitcoin’s completely distributed model. All verified Liquid nodes can ensure that the amount of bitcoins inside of the Liquid Network is identical to the amount of bitcoins frozen in the main chain.

Wait a second-What is this federation?

Liquid is a federated sidechain, so it will never be as decentralized as Bitcoin. However, Liquid is designed to remove control from any single party, geographic location, or political jurisdiction. The Liquid Network is operated by functionary servers, each securely hosted by geographically dispersed, independently owned and operated Bitcoin exchanges.Updates are deployed by consensus of participants within the network. No single party, including Blockstream, can control the Liquid network, and furthermore, no single entity is in control of more than a single Liquid functionary server.

Hence why I said it kinda like a masternode.
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What are the benefits of Liquid?

Faster Trading – Near instant bitcoin transfers between exchanges allow your users to take advantage of arbitrage opportunities like never before.
Enhanced Efficiency – Market makers can improve their capital efficiency by reducing balances held across multiple exchanges.
Better Privacy – Liquid supports Confidential Transactions for bitcoin amounts transferred in the system, which protects your users from exposure.
https://bitcoinmagazine.com/articles/confidential-transactions-how-hiding-transaction-amounts-increases-bitcoin-privacy-1464892525/
Superb Reliability – Built using the battle tested Bitcoin code-base, Liquid software is highly reliable. Also, since Liquid uses signed blocks instead of mining, blocks are always one minute apart instead of an unknown amount of time like Bitcoin.

How will users use the Liquid Network?

Liquid is made to help the traders same money so the exchanges will hide the complicated work and make it super easy.

Exchanges that are members of the Liquid Network have the ability to send bitcoins to other participating exchanges through the Liquid Network. They can then do this on behalf of customers to send money between different exchanges. First a customer would request a deposit address from the destination exchange. This address would be similar to a Bitcoin address but begin with the letters CT. The end user would then take this address to the source exchange and request a withdrawal from that exchange and enter the destination address. The source exchange would then send bitcoins through the Liquid Network to the other exchange who would wait for confirmations of the deposit and credit your account. Users never need to directly access the Liquid Network or hold bitcoins on the Liquid Network – exchanges will do this for you.

So pretty much you just use the exchange normally as you can 🙂 Again this for traders.

Can any company use the Liquid Network?

Access to Liquid beta is free. There is no requirement for beta participants to move forward with a commercial contract. If you’re interested in getting early access to Liquid, request to join the beta program. Once the Liquid Network goes live, there is a monthly subscription fee to pay for development/security of the network.

What are the differences between Liquid and Lightning Network?

The Liquid sidechain is purpose-built to cater for the needs of exchanges, brokers and traders, enabling the rapid, secure and confidential transfers of large amounts of bitcoin between participants. The use of a blockchain allows for transfers to be made that are not bound by such things as a single user’s channel capacity. Transaction finality is assured once a transaction is included within a block and there is no risk of chain reorganization due to the process of Strong Federation block signing. Transactions are therefore not subject to delay due to the lack of cooperation of other parties. Funds in the sidechain can be increased by member exchanges pegging more bitcoin into the sidechain.

The Lightning Network is designed to enable the near-instant transfer of small or micro value payments between linked channel members and merchants. Transactions are limited in amount to channel capacity, specifically the capacity of the smallest channel in the ‘hops’ from sender to receiver. This means that there are cases where you may wish to send bitcoin through Lightning and a new channel would need to be created. This would require a new on-chain transaction in the Bitcoin network. To reduce the risk of monetary losses, the current maximum channel capacity is currently limited by the protocol to around 0.168 BTC. Transfers on the Lightning Network can also experience delays if a payment must route through parties that are not on-line, resulting in the potential need to open a new channel in order to route around them.

However in theory the LN can also be added to Liquid in the future.

Does Liquid support assets other than bitcoin?

Yes it does!
Issued Assets (IA) allow Liquid users to create their own token asset on the Liquid sidechain. These assets can represent existing financial instruments like tokenized fiat, crypto assets, attested assets (e.g. gold coins), or completely new assets. Users transact privately with Confidential Assets which hide both the amount and asset type in a transaction from outside parties.

Several features of Issued Assets on Liquid:

Issuing a new asset in any quantity
Sending a single transaction with several assets
Transacting privately using Confidential Transactions, with amounts and asset type known only to the parties of the transaction
Destroying quantities of an asset
Issued Assets can also, optionally, be created such that additional quantities of the asset can be issued over time.

These features allow for use cases like the creation of digitizable collectables, reward points, token sales, and fiat, all of which can be issued on Liquid.

Atomic swaps on Liquid allow users to trade one asset for another without the need for a trusted third party. Since Issued Assets and bitcoin can each be inputs and outputs of a Liquid transaction, a bitcoin/asset swap can be completed in a single transaction. Likewise, with Issued Assets that represent alternative cryptocurrencies on the network, you can create a single transaction in Liquid that contains different assets.

While technologies to issue digital tokens exist today, we believe that Liquid’s Issued Assets have the following advantages:

Built on a secure, Bitcoin-backed sidechain
Ability to transact with amounts and asset types hidden
Transaction finality in under 2 minutes
Easier technical integration with one platform containing all digital asset representations

https://blockstream.com/2018/07/02/liquid-issued-assets.html

Remember due to the master node structure Liquid can have bigger blocks and faster blocktime hence more scale. Also in theory the LN can also be added to Liquid in the future.

Another major beneift to Liquid is more liquidity. Get it?

So basically exchanges are all connected to each other. So all exchanges can sell on each other exchanges using a average price feed . This would mean the diff in bitcoin prices would be lower and when an exchange’s traders needs more bitcoin to sell or buy, other exchanges can help out 🙂

Liquid Network is out but in beta mainet testing.
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As I told before not even Blockstream control how liquid works 🙂

Yes I know this is not what you thought of sidechains I get.

But pegging in a trust less way is hard…
You heard of all the talk of drivechains(or from my RSK post 😛 )
but Drivechains swap out Federation with Miners.
http://drivechains.org/what-are-drivechains/how-does-it-work/

Drivechains could be trustless(enough)-it just it depends on alot of game theory. Of course certain things could be done to further increase dricechain’s security of funds. The question is how much does Miners control of funds and/or is is better?

Something like Plasma could be added to bitcoin albeit major difference in adding/coding it alot of opt codes are going to be turned on over the years now due to segwit(so maybe it could be sneaked in).

Maybe the peg could be made using some type of extension block style thing.
https://bitcoinmagazine.com/articles/how-extension-blocks-are-backward-compatible-and-how-theyre-not/

Again this is all assuming drivechains can’t be improved.

For now-all we can do is wait.
The federation can’t make fake bitcoins-you can verify the peg. Sorry not tether 2.0 😛

Also a small comment over the FUD of Blockstream destroying bitcoin:

Liquid is to make centralized exchanges safer and faster.

The federated part isn’t that bad. You can verify if they are pegging it right. They can’t make any fake bitcoins(unless it a major bug but it be a blockchain bug which mostly likely affects bitcoin as well).

Blockstream never hide this fact though…
Why is it such a big surprise? Was a soft fork for sidechains ever added(hell the only being worked on is drivechains and it replaces the federation with miners)?
The federated part is only temporary until a trustless soft fork peg can be made. Until then the federation is ok.
Liquid removes the problem of a single point of failure and custodial control by individual exchanges of user funds.

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