The Liquid Network is an open-source, inter-exchange settlements sidechain that’s built using the Bitcoin codebase.
It’s centrally governed by participating exchanges and institutions and allows for quick and private transactions, and for the issuance of digital assets such as tokenized securities.
It has a native currency (LBTC), which is pegged one-to-one with BTC, and for every LBTC in the network it is verifiably backed one-to-one by authentic BTC.
What is The Liquid Network?
Launched in September 2018, the Liquid Network is a sidechain built on Bitcoin with the aim of providing fast, secure, and confidential transactions for exchanges, brokers, market makers, and financial institutions.
It was developed by Blockstream, and is run by partners, such as Bitfinex, BitMEX, Coinone, OKCoin, Huobi, SIX Swiss Exchange, and wallet manufacturer Ledger, who all run full nodes and partake in the governance and validate transactions and block production on the network.
Being a separate chain, Liquid produces its own blocks and hosts its own crypto assets, and the native token, Liquid-Bitcoin (LBTC) is pegged to BTC and every LBTC is backed by actual Bitcoin.
From launching in September 2018 until December 2019 there was only 96 LBTC in circulation. However, after December 2019 the amount of LBTC spiked exponentially and there are now 2160 LBTC in the network all backed by BTC.
Moving BTC to LBTC on The Liquid Network
For security reasons converting from BTC to LBTC requires the completion of 102 Bitcoin blocks so it takes quite a while to convert.
Anybody can get involved and create an LBT by going through a process known as ‘pegging-in’.
Basically, you’re locking up some BTC in a Liquid Network multisig wallet.
The wallet will freeze the BTC and produce the same amount of LBTC on the Liquid Network, and once produced the LBTC is yours to use on the Liquid Network.
The pegging in process with Blockstream takes some technical know-how, and has to be done through a participating full node. It is much easier to do on a member exchange, so I would advise this for the average person.
Once you have LBTC you can trade it on an exchange or send it to your Liquid wallet. Transactions on Liquid include a transaction fee that is used as ‘a denial of service protection mechanism.’
Transaction fees are a minimum value of 1 satoshi, but can get more expensive with congestion. That’s said it is much cheaper to transact on Liquid than on the Bitcoin mainchain.
Although, it must be said, the payments aren’t processed as quickly as what they are on Lightning Network, as Liquid is more for inter-exchange settlements rather than everyday payments.
Liquid does offer confidential transactions, however. Any transaction on the network is open, but sensitive financial data, such as the amount and asset type are secure and known only to the parties involved.
Converting Back to BTC
‘Pegging-out’ is when you choose to convert LBTC back to BTC. This is much easier than pegging-in and can be done through a member exchange, and only requires 2 Liquid blocks for confirmation, which should take a maximum of two minutes.
Create Your Own Liquid Asset
Anyone wanting to create their own asset on Liquid Exchange can do so quite easily.
Creating an asset to represent existing financial instruments like tokenized fiat, tokenized gold, or even securities are possible on Liquid and they can all be traded within the network.
NFTs can also be created on Liquid to represent digital collectibles such as digital art or in-games purchases such as skins.
All assets have their own unique identity, and the creator of the assets will keep track and control the issuance of them.
For things like securities there will obviously be regulatory procedure to complete, but it just shows what is possible on Liquid.
Bringing it All Together
Liquid Network isn’t a network designed for Bitcoin mass adoption. It’s designed to make it easier and faster for financial institutions to interoperate with Bitcoin.
It will help ease congestion on the Bitcoin main chain and could become the way exchanges transact in the future.
It’s cheaper, and once it’s easier to onboard users, I can see it becoming the way traders will transact.
It could also become the platform for tokenized securities. Pretty much any type of asset can be tokenized, and pretty much any asset can be created on Liquid Network, and by using the Bitcoin codebase, Liquid gives any asset the security of the Bitcoin network.
The world will be tokenized, and it could end up on the Liquid Network.
Author: Tommy Limpitlaw