On October 10th, the Blockstream social media channel announced the successful launch of the "Liquid Network". In short, this project is a Bitcoin sidechain, and it was born due to the cooperation between Blockstream and 23 of the largest institutional participants in the industry. A glance at the list reveals participating entities such as Bitfinex, BitMEX, Coinone, OKCoin, and Xapo.
All these participants are carefully selected with the purpose of creating a geographically diverse network to ensure maximum decentralization. Of course, the liquid network is not as decentralized and open as the Bitcoin protocol, and will never be as decentralized and open as the Bitcoin protocol, but this is not the point.
Why does Bitcoin need a side chain? All this is to expand the scale of the king of encryption and enable it to handle transactions in a more efficient manner. The unexpectedly high demand in the fall of 2017 showed the technical limitations of the agreement, and efforts to help scale the system were largely prioritized.
From SegWit to the Lightning Network, we have all seen that this happens quite quickly, and Bitcoin has always been known for its slow conservatism in the past. But this time, what we see is a project whose scope and practice are very different from the publicly accessible solutions mentioned earlier: now it is about the needs of Bitcoin exchanges.
Why does Bitcoin need the Liquid network?If SegWit introduces block malleability repairs, allowing block sizes to be increased when demand is high, lightning allows network participants to open payment channels to settle transactions without expanding the blockchain. The Liquid network is completely different. First and foremost, this is what Blockstream calls a "joint side chain", where the power of control is concentrated in the hands of a few institutional elites engaged in trade.
The idea is simple: why verify every transaction on the main chain and risk handling network congestion, while you can only operate on the side chain and request verification. When is it necessary to do this? This is the second layer of reconciliation. It promises to deliver confirmed transactions within two minutes, providing greater efficiency by sharing a common ledger between them, and even allowing only the sender and receiver to see the ongoing amount. Private transactions.
There are often a large number of BTC transactions between Bitcoin exchanges, and the business may be unpredictable in terms of settlement time and fees. This is why BlockStream brings this solution to these institutional participants: creating convenience and predictability while freeing up Bitcoin block space. In the end, the adoption of LISH is beneficial to both temporary users who trade on the main chain and exchanges that choose a joint side chain, because the reduced operations in the process of miners will result in faster verification time and lower fees.
The difference between Liquid Network and Lightning NetworkBoth the Liquid Network and the Lightning Network were created for the scale of Bitcoin, but for different purposes. The Liquid network meets the needs of Bitcoin exchanges that seek to reduce costs and improve efficiency, while the Lightning Network is more universal and allows parties to trade through open trading channels. On the core issue, they exist to help Bitcoin expand in an uncompromising way, but this will not weaken the inclusiveness of Bitcoin as a protocol, nor will it weaken Bitcoin’s mistrust and resistance to censorship. The characteristics of sound currency.
However, they accomplish this task in different ways and different types of users. One major difference between the two is that the Liquid network is more centralized. Although the Lightning Network allows anyone to run a node in order to participate in the system, the joint natural framework of the Liquid Network only allows one institution to be part of governance.
Given its scope and purpose, it makes sense for Blockstream's solution to be more centralized: Bitcoin exchanges handle large amounts of coins, which require predictability and reliability. Such participants are not necessarily interested in the microtransactions brought about by the Lightning Network. They would rather have a closed agreement that suits their needs and interests.
"The Blockstream team is excited to announce that the Liquid network now has 23 members! With the issuance of the world's first digital assets, the Liquid network supports fast, secure and confidential transactions."
The Domination and Selling Point of Liquid NetworkAs previously determined, Blockstream's Liquid network is far superior to the Bitcoin protocol and the Lightning Network in terms of concentration, and currently involves 23 of the largest companies in the industry. To achieve diversity, these stakeholders are selected based on geographic criteria, avoiding the concentration of power in the hands of greedy factions, or governments in a certain area that try to take over the network. This is why this list includes exchanges and financial institutions from all over the world. In the true spirit of Bitcoin, no one party can enforce a certain version of the agreement.
The system operates on the basis of consensus, each organization can only have one server, and participants must vote to decide whether to update. At the beginning, Blockstream will provide a neutral and generally agreed version of the Liquid network, but over time and unpredictable circumstances emerge, certain improvements may be proposed. If one party is not satisfied with the changes, then it can choose not to run the update, thus pushing all participants to find a consensus to maintain the functionality of the system.
On October 11, 2018, these were added: Altony, Atlantic Financial Corporation, Bitbank, Bitfinex, Bitmax, BitMEX, BITSO, BTCBOX, BTSE, Buull Exchange, DGroup, Coinone, Crypto Garage, GOPAX (Streami), Korbit, L2B Global , OKCoin, Rock Trading, 6 Digital Exchange, Unocoin, Xapo, XBTO and Zaif.
An important feature of the Liquid network is confidential transactions, which may be its selling point. Yes, institutional participants who choose to use this agreement will pay a monthly subscription fee, which may be more convenient than paying for higher main chain transaction fees. Last but not least, it should be noted that the Liquid network can operate with other cryptocurrencies. At this point, since the transactions of other currencies are much cheaper and faster than Bitcoin, it makes no sense for exchanges to choose this scalable solution. But in the next bull market, this situation will definitely change, especially in terms of proof of work tasks. Once again, the convenience of confidential transactions is absolutely appreciated by institutional actors.
When asked about the impact of the Liquid network on Bitcoin exchanges and ordinary users, Samson Mow, Chief Strategy Officer of Blockstream, said: "The Liquid network is designed for settlement between exchanges, which means that between exchanges or transactions The exchange can quickly transfer funds between the exchange and the over-the-counter trading desk. For the exchange, if the currency is easier to move quickly, it will mean greater trading volume; the over-the-counter trading desk will be able to obtain bitcoin from the liquid exchange , And deliver in a few minutes. It really depends on your definition of a Bitcoin user, but traders can transfer funds between exchanges within a few minutes, stealing arbitrage opportunities. In addition, once the Liquid wallet is released, traders It is possible that LiquidBTC will be withdrawn from the exchange at the end of a trading day because they know they can withdraw their deposits within a few minutes.
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