Introduction

The Liquid Network is a sidechain of Bitcoin that was created by Blockstream in 2018. It is designed to improve the speed, security, and privacy of Bitcoin transactions. It's like a separate highway that runs alongside the main Bitcoin blockchain. The Liquid Network offers a few features that the Bitcoin blockchain and Lightning Network don’t and can be viewed as the middle-layer solution to Bitcoin scaling. Let’s dive into what the network is and what problems it attempts to solve for the Bitcoin ecosystem 👇

What is the Liquid Network?

The Liquid Network is a separate blockchain (layer-2) connected to the Bitcoin blockchain. This allows for faster and more confidential transactions than are possible on the Bitcoin blockchain itself.

How does it work?

To use the Liquid Network, you need to lock up some of your Bitcoin in a process called "peg-in." This is done by sending your Bitcoin to an address that's generated by the Liquid Network. Once your deposit is confirmed, you'll be issued an equivalent amount of L-BTC, which is Bitcoin that can be used on the Liquid Network.

To get your Bitcoin back, you need to "peg-out." This is done by sending your L-BTC back to the Liquid Network. The Liquid Network will then send your Bitcoin back to the address that you sent it from.

The Liquid Network is a great way to use Bitcoin for things like trading and issuing new assets. It offers faster transaction speeds and more privacy than the Bitcoin blockchain.

Who runs it?

The Liquid Network is operated by a group of companies and organizations called the Liquid Federation. The Liquid Federation is made up of exchanges, financial institutions, and other Bitcoin-focused companies. The members of the Liquid Federation collectively manage the network and guide its development.

If you're interested in learning more about the Liquid Federation, you can visit the Liquid Network website. The website has information about the members of the Liquid Federation, as well as information about how the Liquid Network is governed. Learn more here.

What are the benefits of using the Liquid Network?

The Liquid Network offers a number of benefits over the Bitcoin blockchain, including:

• Faster transactions: Liquid blocks are added much more frequently than Bitcoin blocks. Liquid blocks are added every minute, while Bitcoin blocks are added every 10 minutes. This means that transactions on the Liquid Network are processed much faster than on the Bitcoin blockchain.

  In addition, Liquid blocks cannot be reorganized. This means that once a transaction is added to a Liquid block, it is guaranteed to be permanent. This is not the case on the Bitcoin blockchain, where transactions can be reorganized if a block is orphaned.

  The combination of these two features means that two confirmations on the Liquid Network are sufficient to establish the final settlement of a transaction. This is much faster than the six confirmations that are required on the Bitcoin blockchain.

• Confidential transactions: Transactions on the Liquid Network are confidential by default. This means that the sender and recipient of a transaction are not visible to anyone else on the network.

• Support for multiple assets: The Liquid Network supports multiple assets, including Bitcoin, Bitcoin Cash, and Litecoin. This allows users to trade and exchange a variety of assets on the network.

• Atomic swaps: Atomic swaps are a type of transaction that allows users to exchange assets between different blockchains without the need for a third party. This is a powerful feature that can be used to create decentralized exchanges and other financial applications.

The Liquid Network is a powerful tool that can be used to improve the speed, security, and privacy of Bitcoin transactions. It is universal and accessible 24/7, 365 days a year. Its distributed network allows for permissionless P2P trading of financial assets globally, all settled through the Bitcoin blockchain. It is a valuable asset for businesses and individuals who want to use Bitcoin for a variety of purposes, outlined in more detail below.

Use Cases

Trading

The Liquid Network can be used to trade Bitcoin and other assets more quickly and cheaply than on the Bitcoin blockchain. This is because the Liquid Network uses a different consensus algorithm that is designed for speed and scalability.

Lending

The Liquid Network can be used to lend and borrow Bitcoin and other assets more securely and efficiently than on the Bitcoin blockchain. This is because the Liquid Network uses a smart contract system that allows for trustless transactions. To dive deeper into the technicals behind Liquid, you can visit the developer docs here.

Issuing Security Tokens

The Liquid Network can be used to issue security tokens, which are a type of digital asset that represents ownership in a company or other entity. This is because the Liquid Network offers a secure and compliant environment for issuing and trading security tokens, along with stablecoins and other financial instruments.

Liquid vs. Lighting

Here we will outline some of the major differences between two of the major layer-2 payment solutions for Bitcoin; The Lightning Network and The Liquid Network. While Lightning is more optimized for retail (smaller, quicker transactions), Liquid is optimized for traders, financial institutions, and exchanges (larger transactions, more privacy).

Transaction Size

The lightning network is optimized for smaller transaction sizes, as the channel is limited by the amount of liquidity that is added to the channel. So as transaction sizes scale, it becomes less likely that a pathway will be found from buyer to seller.

The liquid network, on the other hand, is optimized for medium to large-scale transactions. This is because it operates on a side-chain, allowing users to transact with tokens that are 1-to-1 exchangeable for Bitcoin (called L-BTC). Right now, fees are low enough that users can also transact with smaller-scale payments, but as the network grows fees will grow as well which will eventually make these smaller payments unusable on the chain.

On and Off Ramps

Lightning

To use the Lightning Network, you need to open a channel with another user. This requires funding a multisignature address with both users' Bitcoin. Once a channel is open, you can send Bitcoin to each other through the channel. To close a channel, you need to agree on the final balance of the channel and broadcast the Bitcoin back to your wallets on the Bitcoin blockchain.

Opening a channel:

1. Both users need to create a Lightning wallet.

2. Both users need to fund their Lightning wallets with Bitcoin.

3. Both users need to connect to each other's Lightning wallets.

4. Both users need to agree on the amount of Bitcoin they want to fund the channel with.

5. Both users need to sign the transaction that funds the channel.

Once the channel is funded, users can send Bitcoin to each other through the channel. These transactions are settled off-chain, which means that they do not need to be broadcast to the Bitcoin blockchain. This makes Lightning payments much faster and cheaper than on-chain Bitcoin payments.

Closing a channel:

1. Both users need to agree on the final balance of the channel.

2. Both users need to sign the transaction that closes the channel.

3. The Bitcoin in the channel is sent back to the users' wallets on the Bitcoin blockchain.

The opening and closing of Lightning channels represent Lightning's on- and off-ramps. On-ramps are ways to get Bitcoin onto the Lightning Network, and off-ramps are ways to get Bitcoin off the Lightning Network.

Liquid

The "two-way peg"

The two-way peg is a process for creating Liquid Bitcoin (L-BTC) by transferring BTC to a Bitcoin address and temporarily locking it. The output of these transactions is then used to unlock an equivalent amount of L-BTC on the Liquid Network.

To convert L-BTC back to BTC, users can conduct a peg-out operation via a Liquid Federation member. This involves broadcasting a transaction that sends the L-BTC back to the Bitcoin blockchain.

Swapping BTC <> L-BTC on an exchange/swap platform

Users can also swap BTC for L-BTC or vice-versa on an exchange or swap platform. This is a more convenient option for most users, but it may come with higher fees.

Once the BTC has been swapped for L-BTC, users can easily store their coins using a non-custodial wallet (AQUA, Blockstream Green, SideSwap) and even hardware wallets offline (Blockstream Jade, Ledger Nano S).

Speed

Payments via the Lightning Network can be made almost instantly. This is because Lightning payments do not require confirmation on the Bitcoin blockchain. Instead, they are settled off-chain through a network of nodes. This makes Lightning payments much faster than on-chain Bitcoin payments, which can take several minutes to confirm.

While slower than Lightning, transactions on the Liquid Network are still faster than on the Bitcoin blockchain. This is because Liquid blocks are produced at regular one-minute intervals, while Bitcoin blocks are produced at regular ten-minute intervals.

Privacy

Lightning

The Lightning Network provides users with a greater degree of privacy than on-chain Bitcoin transactions. This is because Lightning payments are routed through a series of nodes, which makes it difficult to trace the origin or destination of a payment. Additionally, Lightning payments are not recorded on the blockchain, which provides an additional layer of privacy.

However, it is important to note that some level of monitoring is still possible with Lightning. Individual nodes can record the channel and direction information from transactions they are asked to process. While this method of surveillance has limitations, it still represents a privacy concern.

Ultimately, the level of privacy that the Lightning Network provides will depend on how users choose to use it. By taking steps to protect their privacy, users can minimize the risk of their Lightning transactions being tracked.

Liquid

The Liquid Network provides users with a greater degree of privacy than the Bitcoin blockchain. This is because the amount of funds and type of asset transferred are not revealed to anyone other than the sender and recipient. This is made possible by a cryptographic protocol called Confidential Transactions.

Liquid's high degree of privacy represents an important benefit for traders. Since on-chain analytics make others aware of large movements of funds on the Bitcoin blockchain, markets can react and prices can change before traders have the opportunity to trade at their desired price. Due to the confidentiality of Liquid transactions, traders can trade without the risk of alerting other users to their trading intentions.

Here is an example of how Liquid's privacy benefits traders:

Custody

One risk with the Lightning Network is that users must hold their keys online until a channel is closed. This means that they are vulnerable to attack if their computer is compromised.

Another risk is that multisig Bitcoin storage is not possible on Lightning. This means that funds need to be controlled by a single key, which is not ideal for storing large amounts of Bitcoin or for institutions that may not want a single person to have sole access to their funds.

Overall, the Lightning Network is a secure network, but it is important to be aware of the risks before using it.

Here are some additional security tips for using the Lightning Network:

• Use a strong password and two-factor authentication for your Lightning wallet.

• Keep your computer up to date with the latest security patches.

• Do not open links or attachments from unknown senders.

• Be careful about what information you share online.

The Liquid Network on the other hand uses a cryptographic protocol called “Confidential Transactions” that was developed by Blockstream to ensure that only the sender and recipient of the funds are able to see the amount transferred. This allows users to circumvent on-chain analytics platforms that could broadcast the trade and impact the price (bots like “whale alerts”, analytics platforms, etc.). However, KYC may be required to convert the L-BTC back to BTC, so users should plan accordingly.

Helps you avoid this 👇

Trust

The Lightning Network uses two-of-two multisig channels, which means both users must agree on any changes to the balance of that channel. This ensures no user is able to steal from the other. The Lightning Network is secured by the Bitcoin network, but transactions are not directly broadcast to the blockchain. Instead, they are routed through a network of nodes. This allows for faster and cheaper payments. As long as both parties are constantly monitoring the channel state, the Lightning Network is a highly trust-minimized payment protocol.

Liquid’s trust model, on the other hand, is based on a federation consisting of 15 hardware security models (HSMs) which are attached to host servers, or “functionaries”. While some trust is required, this distributed Federation system is still quite a bit more secure than existing exchanges where all of the trust is reliant on that particular exchange.

Conclusion

The Liquid Network is a promising technology with the potential to make Bitcoin more useful and attractive for a wider range of users. It is still under development, but it is already being used by a number of businesses and individuals. The Liquid Network could revolutionize the way that Bitcoin is used, and it is worth keeping an eye on its development. It has the potential to fill the holes of scalability where Lightning falls short and offers solutions to problems that could arise as the Bitcoin ecosystem grows and evolves.

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