Liquid Network: private sidechain or gaming paradise and NFT on Bitcoin?
You may have already read on Coinmarketrate.com about projects looking for the perfect solution for smart contracts on Bitcoin, the most interesting of them are RSK or RGB. Liquid Network – the federated Bitcoin sidechain is also undoubtedly one of those worth mentioning. Especially in the last year, discussions about this have become quite lively again. The question is whether this is due to the successful progress in development, or rather, to the connection with recently popular topics such as Blockchain gaming or NFT. In any case, Liquid is a project that brings interesting things to the Bitcoin universe, but also a lot of controversy. Let’s take a closer look at it.
Origin, authors and original purpose of Liquid Network
Liquid Network was created in 2014 as a project of the main developers of the VTS under the leadership of Adam Beck, and from the very beginning was supported by the Blockstream non-profit organization. In May 2017, the code was released to the test network. However, it wasn’t until October 2018 that the first live version appeared on the Bitcoin network. Liquid Network is being developed as a sidechain designed to provide faster, safer and more confidential transactions between individuals and, more importantly, institutions such as exchanges, brokers and other market makers.
The second main goal of Liquid will also be useful for large players – creating the possibility of easy issuance of tokenized assets on Bitcoin. The concept of Blockstream was to make available to kit traders and investors a fast, cheap and private transfer of large volumes of BTC and valuable tokenized assets.
From the very beginning, Liquid Network was not developed primarily as a smart contract platform for Bitcoin. These trends developed only later. We’ll come back to this later in the article.
Liquid Network Sidechain was built on the Elements platform. It is an open source platform that can be used to create sidechains, as well as completely separate blockchains. With its help, developers get access to such powerful functions as confidential transactions or issued assets. Then the Elements platform was created in the form of several new cryptocurrency opcodes, expanding those that were previously implemented in Bitcoin. Since it is built on top of the main Bitcoin code, Elements can also act as a platform for testing changes in the BTC protocol itself.
Blockstream is also the company behind Elements. She created and released it even before the launch of Liquid Network as a separate product designed primarily for creating private sidechains.
How the federated Sidechain works
Sidechains are autonomous blockchains that work in parallel with the main Bitcoin chain (mainchain), to which they are connected using various mechanisms. The sidechain has its own protocol and works on nodes other than the main one, but they usually do not issue their own tokens, but work with a “linked” asset that can be exchanged for the native asset of the main one.
We can assume that the sidechain is a separate blockchain operating in parallel with the main one. However, since it was launched later than the mainchain, its first link (block) begins in the middle of the mainchain development.
Thus, the Liquid Network is a federated sidechain that relies on a kind of board of directors (Liquid Federation) consisting of several Blockstream partner companies to provide binding. Their joint management of the transfer of values between the main and secondary chains works on the principle of strong federations. They offer an interoperable blockchain solution to eliminate the risks that may arise when centralized third parties work together.
Within the framework of Strong Federations, the script implements the so-called “k-of-n” multi-signature scheme. Its mechanism requires blocks to be signed by a certain number of signatories (individual member companies of the Liquid Federation) using special hardware devices (functionaries). Figuratively speaking, if the system does not receive X out of Y necessary signatures, the block will not close, and a minority of hypothetically compromised members of the Liquid Federation will not be able to influence the system in their favor.
Currently, the Liquid Federation has a total of 57 members, including cryptocurrency exchanges, trading platforms, infrastructure providers, gaming companies and firms providing digital securities services. Among the most famous are Bitfinex, Bitmex, Huobi, OKCoin, Hodl Hodl, Ledger, Condensat and Satoshi’s Games.
In the image above you can find a list of all 57 active members of the Liquid Federation.
How to work with Bitcoin in Liquid Network
Due to the relationship between sidechain and mainchain, it is possible to use the native mainchain currency. The so-called two-way binding (peg-in /peg-out) in the Liquid Network works in a ratio of 1:1 to the BTC, so for each crypto asset that you fix in the mainchain network and transfer to the sidechain network, you get one BTC Liquid (abbreviated L-BTC).
Peg-ins essentially just require you to send your Bitcoins to a multi-signal address controlled by Strong Federations members. Peg-outs (transfers back to the BTC chain) require you to transfer your L-BTC balances through one of the exchanges included in the Liquid Federation. As a result of the binding, Strong Federations multisig verification will occur and the required amount of L-BTC stored on the sidechain will be “burned” in a ratio of 1:1 to release previously blocked assets on the main chain.
Two-way binding scheme
This is what the two-way binding scheme looks like.
Liquid: decentralization and security
As you probably already understood, the disagreements about the Liquid Network are connected precisely with the issues of decentralization and security. Above you could read about how the federated sidechain works. No one is going to drive their opinion into the heads of others, but everyone should, studying the principles of Liquid, honestly answer the question, is the meaning of a system provided by several dozen private centralized companies instead of a decentralized network of miners completely opposite to the original idea of Bitcoin?
The Bitcoin community is concerned about the security of sidechains, and many core developers agree that the security of the main Bitcoin protocol does not matter in the case of L-BTC, since the only security is the security of the sidechain itself, and therefore it is completely in the hands of the members of the Liquid Federation.
What can work on Liquid
The Liquid Network sidechain is a separate blockchain with additional functions in relation to the main BTC blockchain. Its capabilities go far beyond faster and more confidential transactions for traders and institutions with a large volume of transactions. They additionally distribute the risk of storing their trading funds on specific exchanges among all members of the Liquid Federation, for example, by storing funds at a private Liquid address.
But new tokenized assets can also be released on the network, such as utility and security tokens, stablecoins and digital collectibles in the form of NFT. Sidechain should also be ready to tokenize FIAT currencies or introduce cryptocurrencies from other (non-Bitcoin) blockchains. Like ERC-20 tokens, these assets can be freely traded on the network, taking advantage of its confidentiality and speed.
The Liquid Network does not have support for smart contracts at its core, but already today decentralized financial (DeFi) services or even blockchain games can work on it thanks to various expansion opcodes. Below you will find some information about the most interesting services running on Liquid.
- Big Boy Tether Comes to Liquid
The first major tokenized asset to appear on the Liquid Network in mid-2019 was Tether (USDT). This was a big step forward for the sidechain and Tether itself, which initially worked on a much slower, less secure and not very reliable platform – Omni Layer. On Liquid, Tether is designated as L-USDT, and its main function, of course, is to protect traders and institutions from the increased volatility of L-BTC.
- The Lightning Network is also on the Liquid network
Although Liquid can process about 2-3 times more transactions per second than Bitcoin, its blockchain is also not completely unlimited. And since the network is expected to grow in the future, the Lightning Network has also been launched on it, so in a few years even microtransactions on Liquid will make sense (the transaction fee on the network will increase as blocks are filled).
- The BTCPay payment gateway server also works for L-BTC
Having a BTCPay server compatible with the Liquid Network, merchants can independently place their accounts and have full control over the funds received without having to pay additional commissions to intermediaries or payment processors. Customers can also take advantage of Liquid when paying via the BTCPay server. Confidential Transactions technology allows them to make transactions without worrying that merchants or other third parties will see their balance. Thanks to the integration of Liquid into BTCPay, you can also spend stable coins such as L-USDT.
Liquid Network and the hype around gambling or NFT
NFT and blockchain games have become hits of the last two years, with a wild race on Ethereum and other alternative blockchains to create the most dubious jpeg collection or games with the craziest tokenomics. Surprisingly, this trend has also affected the Bitcoin world, and many developers have started trying to link non-interchangeable tokens or games with the most reliable blockchain.
Several of them decided to alleviate the scalability issues of Bitcoin’s first tier and worked with Liquid Network or Lightning to do just that. However, the release of assets, NFT and in-game tokens on the BTC protocol requires more skill and patience, which is probably why most of the resulting games and NFT on the network look pretty hilarious.
In particular, the work of studios that have been developing the BTC blockchain for some time now really deserves attention.
Is Liquid the future or a dead end?
Although Liquid Network was originally created more as a network for fast, private and secure transactions of Bitcoin traders and institutional traders, over time it has turned into a well-developed platform suitable for issuing various tokenized assets, mining in-game NFTs and implementing simple smart contracts, and more complex ones will appear in the future. This sidechain is in many ways ahead of competing protocols on top of Bitcoin, such as RSK or RGB, especially in terms of adoption by institutions and individuals.
However, the question remains, is Liquid, especially with its non-solution to the problem of decentralization and uncertain security guarantees, a suitable place for the future development of the Bitcoin infrastructure, and is it not just a dead end? You have to answer this question by yourself. Many bitcoiners have already found their truth, so it will probably all depend on what the general public decides to believe.