The Liquidity.Network will issue an ERC20 token that is to be used as an integral part of the off-chain ecosystem. This article explains the goals and the motivation of the Liquid (LQD) tokens.
Goals of the Liquidity.Network
Our goal is to build an open network that allows decentralized blockchains to scale through leveraging secure off-chain transactions. We’ve already witnessed how excessive fees became the cost of decentralization in Bitcoin, clearly signaling that technological innovation is needed to cost effectively improve transaction throughput.
Lightning and Raiden are implementations of two-party payment channels. Upon visualizing the existing Lightning Testnet, we can see that there a few payment-channel hubs have formed to facilitate transactions.
This is hardly surprising, as it is human nature to organize around centralized structures. Liquidity.Network hubs are built by design to provide very efficient and secure on-chain settlement of off-chain transactions for n-party payment hubs rather than two-party payment channels, and are designed to efficiently solve the collateral management challenge that regular two-way payment channels suffer from when utilized to build regular payment-channel hubs as observed in the testnet.
The Liquidity.Network is at its core a novel off-chain protocol, while the LQD token is designed to establish a standard token using which the stakeholders in the protocol’s ecosystem can interact and promote its growth.
The Ecosystem Vision
We envision a cross-chain, off-chain payment processing ecosystem whereby hubs can compete to attract end users and merchants. Our aim is to integrate the Liquidity token within this ecosystem such that a competitive open market for secure payment processing can thrive within the network.
Wallet End Users
The personal end users of the system will be the main source of demand for usage of the network. Therefore, to facilitate the creation of this demand, end users will not be encumbered with having to interact using LQD tokens in regular usage scenarios.
The development of the client wallet software will be carried out by the Liquidity.Network team and its source released out to the community. We aim to deliver a cross-chain wallet capable of interfacing with any compatible hub or node.
Anyone may operate a hub using the Liquidity node software. Hub operators will have some technical and managerial responsibilities to take care of to provide services to their users:
- Hub server setup and configuration
- Operational security management
- High uptime upkeep
- Maintaining inter-hub connectivity agreements
Hub operators can also provide several added-value services to the their clients, such as:
- Service Level Agreements (SLA)
While regular users are likely absolutely happy with a standard SLA, professional merchants and payment processors are likely to request dedicated processing capacity commitments from the hub operators.
- API Services
Many credit-card payment providers expose an API to their clients in order to facilitate and coordinate on e-commerce operations. These types of interfaces usually allow merchants to generate payments with reference numbers and additional data that aids the merchant in keeping track of which payments belong to which operations.
Developing the main server wallet software will be carried out by the Liquidity.Network team and made available to the community. Moreover, we will operate and subsidize payment hubs that offer free user-to-user off-chain payment processing for personal non-commercial use.
Off-chain funds should be actively monitored by the users in order to prevent attempts of fraud. Having a strong online presence is a requirement for two-way payment channel security. The Liquidity.Network protocol improves the strictness of this requirement, but does not completely eliminate it.
In our design, channel monitoring can be efficiently performed by other nodes. 3rd-party auditing services may be hired by merchants to mitigate the risks associated with losing connectivity or denial of service. We will develop and release auditing agents that may be utilized by anyone to monitor hub operations.
The Liquidity.Network team will offer to run an auditing service to its users, in case they wish to have added security against 3rd party hubs. Payment for this added value monitoring service will only be accepted in the form of LQD tokens. Of course, others who wish to provide this service may accept other forms of payment, losing out on the network effect of the token.
As the development will be carried out openly and the source regularly released to the community, developers will be free to fork and run their own versions of all our software.
Many possible blockchain applications (e.g. pay per view) have not yet seen widespread adoption due to the need for free and fast off-chain transactions. We therefore see the Liquidity.Network to be an application enabler. To this end, we’re building a standardized API for commercial use (cf. http://liquidity.network/faq/API.html for a spec of the current API), and deploying a reliable infrastructure to meet the demand for this usage.
The Liquidity.Network will strive to provide a high quality free public service to its personal users, but for commercial users and others with high throughput requirements, remuneration for access will be mandatory in the form of LQD tokens.
The Open Marketplace
A core part of our vision for an open network is an open marketplace for payment processing, whereby any hub operator and commercial user may advertise their payment processing services. The purpose of this marketplace is to strengthen the utility value of the LQD token.
As a merchant, or other service, looking to concern yourself with only receiving payments for your products and services, rather than maintaining the security, availability, and user base (why would users lock up funds just for you?) of your own private payment hub, you may want to hire a payment hub to take care of the processing for you.
Remuneration in this marketplace using the LQD token will create a network effect where the hub operators are incentivised to openly participate and compete, increasing the quality and value of off-chain payment processing services. Moreover, insulating remuneration in this marketplace from the volatility of general purpose cryptocurrency prices will help stabilize its value and align it with the growth of the network.
The previous two images represent a mockup of a service. Provider names are purely imaginary and any similarity to real life companies is purely coincidental with no intention of conveying that any third party in particular plans to use this service. Any written prices are listed purely for presentation purposes and should not be taken as indicators of any real life service value.
Utility of the Liquidity Token
Neither the security nor the usability of the core Liquidity.Network protocol fundamentally relies on the usage of a utility token. The operators of the software we release are free to provide services in their own currencies of choice. The LQD token will, at the very least, provide an access right to the infrastructure and services deployed and developed by the Liquidity.Network team. The utility of the LQD token as an access token to off-chain payment processing will increase as the marketplace grows with more members looking to pay for and provide their services in exchange for LQD, forming a network of payment processing service providers that are looking to grow in unison.
Users of the Liquidity.Network will benefit from the token that is being used in the background to incentivise auxiliary services to provide the best possible user experience. We expect the network to provide zero transfer fees, as we will operate Liquidity.Network hubs for free for standard users, driving down transaction costs for everyday users.
Other hub operators and providers of auxiliary services can gain funds by taking LQD based fees, strengthening the token. When the network grows cross-blockchain, then the same token can still be used in the new blockchains.
The LQD token is not a general purpose cryptocurrency. It is a special purpose utility token which will be accepted by the Liquidity.Network in exchange for added-value services. The LQD token is a specialized access right token to the network. The goal of the token sale is to fund the development of the network, and bootstrap the creation of the entire Liquidity ecosystem.
We release a blog post detailing our token auction process very soon. Stay tuned!
Q: What is the value of the LQD token?
Once fully developed, the hubs operated by the Liquidity.Network will only accept payment for added-value services and service level agreements in the form of LQD tokens. The marketplace we establish will also only permit remuneration in LQD. The value of the LQD token is tied to the access right of the established off-chain payment processing services.
Q: Is the token needed to use the Liquidity.Network?
No, personal users are not required to purchase tokens to transact on the Liquidity.Network. To register with a hub, deposit funds and perform off-chain transactions will be free for regular users. However, higher degrees of service, Service Level Agreements, and channel monitoring services for example will require payment in tokens.
Q: Couldn’t the token be forked out?
Any open project can be forked at any time, a fundamental property of blockchain projects that is important to keep. We hope that the token will incentivise users to work with the Liquidity.Network and to grow the ecosystem together, and we aim to give the LQD token the strongest head start by placing it at the core of the project we develop.
Q: What prevents an auxiliary service from accepting payments in token other than LQD?
Any payment means can be supported. For the purpose of the Liquidity.Network however, it makes sense to only have a single token as this simplifies interoperability and negotiations across hubs, unifies a marketplace for payment processing and allows the Liquidity.Network to grow beyond its parent blockchain (e.g. in the event that Liquidity is implemented on Rootstock).
Q: Doesn’t the token add unnecessary friction over using ETH?
The token would only be required for extended services, a standard user is not required to purchase and use tokens. Software can moreover be written to automatically purchase tokens over an exchange, without requiring much interaction of the user. For users that want to purchase additional services for the Liquidity.Network the token certainly adds complexity, but we believe that this cost comes with a significant benefit to the ecosystem.
Q: Why not use the token that’s transferred in the payment channel as the currency?
Liquidity.Network hubs will not only support transferring ETH, but a plethora of different tokens. Service providers looking to leverage the token network effect will want to restrict their remuneration to LQD tokens, as to be in alignment with the incentives of the entire network, and gain the most value from offering their services on the open market.