How is Bitcoin’s ‘Liquid sidechain’ different from the Lightning network?
The Blockchain startup Blockstream recently announced another innovative solution to address the all-important issue of scalability for the Bitcoin blockchain network. But before we get to that, a quick recap of the company itself — Blockstream was founded in 2014, made headlines in the Crypto arena after announcing sidechain Liquid network, was able to secure a funding of $21 million in the seed round followed by $55 million in Series A funding for its flagship product. It was eventually launched by Samson Mow and Joseph Weinberg in 2017. Finally, it released its long-awaited Liquid network which went live on Sep. 27 after a year-long beta testing on the bitcoin blockchain network.
Moving on to the Liquid network itself, as its parent company proclaims on its website it offers:
- Faster Trading — The network has its own native token L-BTC (Liquid Bitcoin) which is pegged to the price of Bitcoin with which it can be readily swapped with anytime. This digital asset lets institutions settle transactions within 2 minutes.
- Enhanced Efficiency — Since the Exchanges are involved in deploying the network it allows for a seamless experience. It also helps since you never have to physically hold the bitcoins on the sidechain itself.
- Verifiable Sidechains — With the pegging of the L-BTC to the Bitcoin on the main blockchain you are always dealing with real & verifiable digital assets.
- Better Privacy — The sidechain offers confidentiality by keeping the asset type & amounts anonymous except for the sender & receiver.
- Superb Reliability — Liquid avoids the congestion of the Bitcoin network which is already clogged to provide an alternative lightweight solution of the sidechain increasing the reliability of the network.
Talking about the operation of the Liquid network, it works as a second data layer to the existing Bitcoin blockchain where it keeps a copy of the digital records of the main blockchain, with the transactions being executed on the sidechain never occupying any space of the blocks of the main Bitcoin blockchain, thus avoiding any network fees. In simpler words, Liquid network provides an alternative route for all the blockchain transactions (much like the Lightning network) for individuals & businesses with added functionalities as described above.
In addition to these core features, Liquid offers Issued Assets feature which allows users to create their own token asset adding another layer of flexibility to the network. Basically, you can create a tokenized version of any asset (FIAT currency, commodities or securities etc.). Secondly, the instant conversion between L-BTC & BTC provides the much-needed liquidity to both the networks & the digital exchanges which perform a large number of transactions. And finally, Blockstream also plans to extend the Liquid ecosystem by including additional features — third-party support for hardware wallets like Trezor and Ledger, a GreenAddress wallet and an open-source wallet client in the near future.
There has been some criticism about Liquid not being an actual Bitcoin sidechain. Technically speaking, a sidechain is a blockchain that has a two-way pegged currency and has the ability to validate the data contained in other blockchains & since Liquid completely satisfies this, the criticism looks a little unwarranted. Mow clarified this in his own words:
I’m not sure by what basis it’s possible to make a claim that Liquid is “not an actual Bitcoin sidechain.” Your technical clarification that “a sidechain is a blockchain that has a two-way pegged currency and can validate the data contained in other blockchains,” is fully satisfied by the mechanics of how Liquid functions.
One wonders here than if Lightning network is also providing a similar functionality than what’s the difference between Liquid network & the former. Looking at the commonalities, both networks address the issue of scalability by offering faster transactions on their sidechains, but the most notable difference between both is that while Lightning is a decentralized micropayment solution which is fast & free albeit, with a limited capacity (an attempt to mitigate the risk to users), Liquid, on the other hand, is a permissioned federated blockchain which is ideal for high volumes & large transactions. It is pretty obvious that Liquid is targeting large financial institutions.
The federated nature of Liquid, however, has seen the biggest critique since most of the Crypto blockchain networks are a hallmark of decentralization. And while Blockstream has confessed that Liquid sidechain would never be as decentralized as the Bitcoin blockchain it has come up with an interesting solution to address the problem. First of all, they have stated categorically that no single party including the parent company will have control of the network & secondly geographically diverse partners will be selected to form a “consensus pool of participants” to ensure the highest possible level of decentralization. On top of that, none of these participants would have control of more than one liquid functionary server. To begin with 23 major Cryptocurrency exchanges have been included as the pioneer Liquid network members — Altonomy, Atlantic Financial, Bitbank, Bitfinex, Bitmax, BitMEX, Bitso, BTCBOX, BTSE, Buull Exchange, DGroup, Coinone, Crypto Garage, GOPAX, Korbit, L2B Global, OKCoin, The Rock Trading, SIX Digital Exchange, Unocoin, Xapo, XBTO, and Zaif. It remains to be seen if this solution will be an effective one considering what has happened with other centralized networks.
Although the Liquid network is a B2B centric solution for faster & reliable processing of transactions, it nonetheless is another major step in solving the scalability issue of the Bitcoin blockchain, along with the adoption of the protocol upgrades like SegWit & Layer 2 solutions like the Lightning network.
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Originally published at www.datadriveninvestor.com on October 17, 2018.