A Look At Bitcoin’s Liquid Nework – The Playgound Layer 2 Solution

Blockstream had a major announcement at this year’s Consensus conference. One of the first Bitcoin startups, the company announced that they would be releasing a product on top of its Liquid Network sidechain. The sidechain was designed to allow for faster coin transfers and built-in privacy. However, now it will also include a platform for security tokens.

Blockstream CSO Samson Mow said that tokenized securities are currently a race many businesses are following. He said:

“Unfortunately, blockchain platforms like ethereum are failing them due to issues with scaling, privacy, and reliability. […] Now, with the launch of Liquid Securities, businesses can quickly issue Liquid-based security tokens with the click of a button, and establish sophisticated rulesets to conform with their regulatory requirements with no engineering experience required.”

The Liquid Network is a digital asset settlement network which links together cryptocurrency exchanges and institutions around the world, enabling fast and private Bitcoin transactions throughout the network.

The Network has been designed to address the particular demands of digital asset traders, providing rapid, confidential and secure transfers of Bitcoin amongst network participants.

*Tighter exchange spreads:​ Traders will be able to rapidly circulate Bitcoin and USDT between exchanges to benefit from pricing differences, thus reducing inter-exchange spreads across major trading pairs.

*Faster trading: Traders are able to react to trading opportunities quicker due to significantly lowered settlement times when sending between exchanges.

*Improved confidentiality: Transactions on Liquid are private by default, hiding the amounts and types of assets transacted from third parties to eliminate the risk of front-running.

Quite recently, Blockstream released an “experimental” tool, dubbed as Liquid Swap Tool, that will enable users to trade “trustlessly” easily between tokens launched on its Liquid sidechain.  

Blockstream uses “atomic swaps,” a cryptographic technology that will serve as the backbone for newer decentralized exchanges currently in development. Such transactions are focused at most exchanges are middlemen trusted by users to exchange cryptocurrency on their behalf.

This specific atomic swap tool is specifically geared for tokens launched on Liquid. In order to use it, users must send their tokens to the sidechain, effectively trading their bitcoin for “L-BTC.”

So again, what are L-BTC? They’re Bitcoin on the Liquid network, pegged 1-to-1 to on-chain Bitcoin. And because you can redeem them for on-chain Bitcoin whenever you want, trustlessly, L-BTC are as good as Bitcoin.

Quite recently, Bitfinex announced they would be integrating Liquid with their exchange and Tether:

“Issuing Bitcoin, stablecoins, and various other digital assets under one blockchain platform makes a lot of sense,” said Paolo Ardoino, CTO of ​Bitfinex​. “It reduces the integration burden for an exchange like ourselves, and traders can manage all their assets from a single wallet application. We’re excited to be active on the Liquid Network, and we’re looking forward to watching it develop.”

I can see the atomic Bitcoin <-> Tether trading on decentralized exchanges like BISQ at the end of the tunnel, and it is beautiful.

The liquid atomic swaps are similar to alchemy, morphing Bitcoin into an altered type of Bitcoin that will be faster with more privacy features. However, it requires more trust in the intermediaries that run the sidechain. Blockstream recently launched a tool for launching security tokens on top of Liquid, which gives rise to its moniker as “Bitcoin’s playground”.

It’s a lot more experimental, and therefore it’s where things like miniscript and Simplicity are to go first — which will give us the ability to run smart contracts off of Bitcoin’s network through Liquid.

“Hold on”, you say. “I think I’m getting nauseous because of all this Bitcoin maximalist talk”.

Liquid is built by Blockstream, sometimes seen as having performed a hostile takeover of Bitcoin core development.

Liquid is federated, which is a fancy way of saying managed or centralized.

Liquid is  wanting you to swap your decentralized asset (Bitcoin) for a centralized s-coin issued by Blockstream.

Liquid is working with Bitfinex and Tether, the very image of manipulation and shiesty business practices.

So, what gives?

For one, I acknowledge that some of those are not a great look. There always seems to be caveats with Bitcoin’s development, and these shouldn’t be minimalized.

But,

Despite Blocksteam’s questionable past, I think they understand the opportunity ahead of us.

Why?

Just look at some of the news over the past few months. Libra, increasing trade and currency wars, and a global race to the bottom as negative interest rates become the new norm.

Oh, and the US Fed is getting in on the instant settlement game, announcing that it is developing its FedNow service, scheduled to launch in 2023 or 2024. The Fed aims to ensure consumers have access to real time payments in any part of the banking system, with Federal Reserve Board Governor Lael Brainard stating:

“FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.”

So, our centralized competition is doubling down.

I’ve often felt it’s imperative for us to build the bridges necessary to proselytize economic activity and users — we won’t get a critical mass of adoption overnight simply because we’re decentralized.

We need hybrid solutions. We need to combine the best aspects of centralization and decentralization in order to possibly compete.

That’s what layer-2 solutions like Liquid and Lightning represent. They’re not the be-all-end-all.

They’re solutions.

They’re expansions to the functionality of what Bitcoin represents.  

Bitcoin has many challenges to overcome, there is so much work to be done, just like on all alts. It has to find a reliable proven scaling technology, which we may already have with LN or Liquid, but we don’t know for sure yet. It needs to have much better UX for second layer wallets on all platforms. It needs to gain the long term trust of billions around the world.