Liquid Network (Liquid)¶

Liquid Network is a Bitcoin sidechain developed by Blockstream, designed to provide professional traders, exchanges, and financial institutions with a faster, more private transaction settlement platform that supports asset issuance. It connects to the Bitcoin mainchain through a "Two-Way Peg" mechanism, allowing users to lock BTC on the mainchain and then receive an equivalent amount of L-BTC (Liquid Bitcoin) on the Liquid chain.

Problems Addressed¶

While the Bitcoin mainchain is secure, it has limitations in the following areas that make it unsuitable for certain financial use cases:

Long transaction confirmation times: Bitcoin blocks are generated approximately every 10 minutes, and transactions require several confirmations to be considered secure.
Volatile transaction fees: Transaction fees spike during peak periods, affecting high-frequency trading and small payments.
Insufficient privacy: All transactions are publicly transparent, making them unsuitable for commercial activities requiring confidentiality.
Limited asset issuance capabilities: Bitcoin Script does not support the issuance of custom assets (such as stablecoins, tokens, etc.).

Liquid aims to provide a solution for these needs. It is a "settlement layer" sidechain rather than a general-purpose smart contract platform.

Implementation Mechanisms and Principles¶

The core mechanisms of Liquid Network are Two-Way Peg and Federated Consensus.

Two-Way Peg¶

Pegging BTC to L-BTC: When a user wants to transfer BTC to the Liquid chain, they send BTC to a multi-signature address controlled by Liquid Federation members. Once the Bitcoin mainchain confirms the transaction, the Liquid chain mints an equivalent amount of L-BTC for the user.
Redeeming L-BTC to BTC: Users can burn L-BTC on the Liquid chain, and the Liquid Federation members then release an equivalent amount of BTC from the multi-signature address on the Bitcoin mainnet to the user.

Federated Consensus¶

Liquid Network blocks are signed and created by a "Federation" composed of independent and trusted members. These members include major exchanges, wallet service providers, and financial institutions. * Function: Federation members jointly run Liquid full nodes, validate transactions, and collectively manage the multi-signature address holding the pegged BTC. * Advantages: Compared to PoW chains, federated consensus can achieve faster block confirmation times (one block per minute). * Decentralization and Trust: Liquid's security relies on the honesty of the Federation members. While it is not a fully decentralized PoW network, because the Federation members are numerous and publicly known, malfeasance by a single member is difficult to achieve, with social and economic checks and balances in place.

Confidential Transactions¶

Liquid Network supports Confidential Transactions, using cryptographic techniques to conceal the amounts and asset types of transactions. Only the parties involved in a transaction and those possessing a Viewing Key can see this sensitive information, while the public blockchain records display only encrypted hash values.

Issued Assets¶

In addition to L-BTC, the Liquid chain allows anyone to issue their own digital assets. These assets can be stablecoins, security tokens, or other custom tokens. The issuance and transfer of these assets can take place on the Liquid chain, benefiting from the network's speed and privacy features.

Key Features¶

Fast Settlement: Short block times (1 minute) with rapid transaction confirmation, suitable for high-frequency trading.
Transaction Privacy: Supports Confidential Transactions, concealing transaction amounts and asset types to protect user privacy.
Asset Issuance: Allows the issuance of custom sidechain assets, expanding Bitcoin's financial application scenarios.
Strong Bitcoin Association: Through the Two-Way Peg, L-BTC is always pegged 1:1 to BTC, inheriting Bitcoin's value.
Professional-Grade Applications: Primarily targeting financial institutions and professional traders, providing more efficient liquidity and trading experiences.