Blockstream’s Liquid Network Shows Huge Promise For A Maturing Bitcoin Market

Bitcoin technology operation Blockstream have recently provided further details on their Liquid sidechain offering, which appears to be shaping into an incredible development for the wider ecosystem. Over the last few years, Blockstream have been quietly working away on the second-layer technologies which will be vital in developing a Bitcoin network which continues to work for users and market participants for years to come. As well as work on their own Lightning client, c-lightning, Blockstream have been developing Liquid as a commercial sidechain offering aimed at exchanges and the largest market-participants, which leverages numerous aspects of their open-source Elements project.

Whilst the much-discussed Lightning network seeks to tackle off-chain micropayments, Liquid takes aim at facilitating larger transactions and those which are denominated in other assets. The sidechain technology is aimed at commercial operations and enables powerful secure transfers, away from the main Bitcoin chain. Based on the “Strong Federations” concept outlined in a white paper, Liquid isn’t beholden to miners for block-signing, instead relying, on a “distributed group of “signatories”, or functionaries, to create blocks”.

Whilst this system clearly relies on a degree of trust in the aforementioned signatories, with Liquid, Blockstream appear to be focussing on working with the largest exchanges and payment processors to enable off-chain means of transferring assets with strong security. As these companies tend to be already given a degree of trust from users lodging deposits with them, true trustlessness can be sacrificed in the name of speed and efficiency. Allowing exchanges to transfer funds off chain, with finality down to the minute will be a particularly useful addition to the Bitcoin market. Such a mechanism would facilitate an important efficiency gain for inter-exchange transfers, enabling more effective arbitrage between different exchanges and various trading pairs.

Testing and development on Liquid has apparently been going on behind the scenes for the last few years, since the original announcement in October 2015. At the time, Blockstream mentioned ongoing collaborative work with a number of exchange platforms, “to address some key technical and business challenges while preserving Bitcoin’s core ethos of decentralization, innovation, and security”. This shows that, far from being developed in isolation, Liquid has been created with a very specific set of challenges and requirements in mind, and Blockstream have engaged with some of the largest exchanges from the outset.

The latest development for Liquid is the introduction of Issued Assets, which will allow novel assets to be issued and transacted with using the Liquid sidechain. In the announcement for Issued Assets earlier this month, Blockstream hinted at numerous possible options for token issuance such as, existing financial instruments like tokenized fiat, crypto assets, attested assets (e.g. gold coins), or completely new assets. A number of Consensus 2018 attendees will have had an opportunity to see a selection of Issued Assets in action, as Blockstream created tokens to represent a handful of merchandise items such as stickers and hoodies. The tokens were distributed to a number of paper-wallets and handed out to conference attendees, who could redeem the tokens for the real items, at which point the digital asset/token was destroyed.

This technology could have powerful implications and many potential use-cases, including the much-discussed tokenisation of existing financial instruments. There is also the possibility of creating fiat tokens on Liquid, similar to Tether which is also built on top of Bitcoin using the Omni Layer. A Liquid-based fiat token would be able to take advantage of the faster confirmation times and improved privacy. Issued Assets on Liquid make use of the confidential transaction methodology that has been established in the elements project to give the essential privacy that many token issuers will most certainly demand. The interoperability of Liquid with the main Bitcoin blockchain gives this technology an implicit advantage over alternatives which utilise an independent blockchain, due to the maturity and high security already established by the pre-eminent Bitcoin blockchain.

In summary, Liquid looks set to be another great addition to the maturing Bitcoin market and shows Blockstream continue to be one of the most dedicated companies building out the technologies and infrastructure with which to allow Bitcoin to scale effectively for years to come.