Why I was wrong about the Liquid Network, it’s better than you think
When I first heard about the Liquid Network it sounded like a cheap and centralized way to wrap BTC in order to avoid paying on-chain fees. This is what most critics of BTC also think but it’s important to know the facts before passing any judgment.
The most important aspect of the Liquid Network is that the Federation members (the ones who secure the network by two-thirds consensus) are restricted from issuing L-BTC arbitrarily. They are forced to respect L-BTC issuance by only producing it once an equivalent amount of BTC has been pegged into the network. This isn’t a matter of social governance or individually trusting the members, the protocol simply does not allow anything else to take place. It stands to reason that this model also prevents any form of fractional reserve banking to occur on-chain, in regards to the L-BTC token. There can be no more on-chain L-BTC than the amount of BTC pegged into the network.
The Liquid Network is also transparent so that the federation members are held accountable. Every block must be signed by two-thirds of federation members and the more members which join the federation, the more decentralized the Liquid Network becomes.
Once pegged into the Liquid Network, L-BTC can be moved to any other liquid address for $0.02 per transaction(5.27.2020) with blocks being produced every minute. Two confirmations is considered secure. L-BTC will not be issued until the pegged-in BTC is at 102 confirmations or more, so it’s extremely secure in regard to every L-BTC having an equivalent BTC locked up.
The Liquid Network incentivizes users by offering them cheap, fast, and confidential transactions. In addition to offering users a better experience, it also relieves volume on the BTC blockchain which decreases the average bidding price for on-chain transactions. When the fees on the BTC blockchain are too high to justify, L-BTC will capture some of the transaction volume and conversely when the BTC blockchain fees are low enough, transaction volume on the chain may increase again. This gives users an option instead of forcing them to pay high on-chain fees when there is high transaction demand. This will achieve a natural market equilibrium in the BTC fee market as the amount of L-BTC ebbs and flows.
The Liquid Network is not a fully centralized network which can issue as much currency as they like. On the contrary, the members are held accountable by the protocol’s rules, which also outline and enforce a federated governance system. In the event of an emergency whereby a third of the federation members are offline, the network would halt until more than two-thirds of the federation members are operating again. However if the network is down for more than thirty consecutive days, two of three emergency keys can be used to access BTC funds so that they may be distributed back to the wallets of the owners. However these emergency keys cannot be utilized to access funds during the normal operation of the Liquid Network.
Of course the Liquid Network is not as secure as the BTC network, but by sacrificing a minimal amount of security for cheap, fast, and confidential transactions, it adds significant value to the ecosystem, and is still considered to be very secure while not compromising the security of the main BTC chain.