The Liquid Network is known as Liquid or L-BTC by Bitcoiners. In this post, we share some insight into what it is, and the role it plays in helping make buying Bitcoin faster.
The first thing to know about Liquid is it shares similarities to the Lightning Network, which you can read all about here. Liquid is a Bitcoin 'sidechain’, meaning it operates as a layer alongside the main Bitcoin blockchain aka the ‘mainchain’. Its purpose is to let people make bitcoin transactions faster than what is possible on the Bitcoin mainchain (the average transaction time on the Bitcoin blockchain is 10 minutes at best, compared to an average of 2-3 minutes on Liquid). It is also cheaper to process transactions on Liquid and lets users make transactions confidentially.
The way Liquid ensures greater speed and transaction volumes is because it has been coded this way. Each L-BTC unit on the faster moving Liquid side chain is backed up by 1 Bitcoin on the mainchain. If you wanted to get your hands on 1 L-BTC, you would need to lock-up 1 bitcoin first.
You do this through a process known as ‘pegging-in’ which can be done in a Liquid-enabled wallet (like Green). When you want to swap your L-BTC back to bitcoin you then need to ‘peg-out’. It's worth noting ‘pegging-in’ to L-BTC requires 102 confirmations on the Bitcoin mainchain. This is to guarantee a mainchain block reorganisation is probabilistically impracticable. Therefore, it may take up to 1 day to peg-in from BTC to L-BTC but only up to 35mins to peg-out.
Liquid’s features could give people the ability to make bitcoin transactions faster. The trade off for this convenience, however, is Liquid is controlled by a federation of 44 members, representing a variety of cryptocurrency companies. The Bitcoin blockchain on the other hand is completely decentralised - no one entity can control it.
Is the Liquid Network a Blockchain?
In short, yes. But it works differently to the Bitcoin blockchain. The reason why the Bitcoin blockchain takes a while to process transactions is because powerful computers used by miners have to compete to authenticate them in blocks on the Bitcoin blockchain every 10 minutes, in a process called proof of work mining (read more here).
Liquid Network blocks are not created through proof-of work mining like the Bitcoin mainchain. Instead, they are created by 15 of its members, called functionaries, which take turns to propose new transaction blocks. The creation of these blocks must be agreed on by ⅔ rds of online functionaries, who validate the payments they are about to put in a block. More than ⅔rds of functionaries must be online to approve this process otherwise the Liquid blockchain freezes until more functionaries come online.
What do transactions look like? (for people who want to understand the technicalities)
Transaction addresses can be viewed as on a normal block explorer. But the Liquid Network uses confidential transactions which hides the amount of L-BTC in a transaction from everyone except the receiver and anyone they designate, giving increased privacy as seen below.
What is Liquid used for?
Liquid’s main use case is to allow quick and confidential bitcoin transactions for traders on exchanges, allowing them to capitalise on trading opportunities without signaling their intention around the underlying Bitcoin price. Liquid also makes trading bitcoin safer because user funds can be held on a personal Liquid wallet as opposed to within exchanges. Asides from this, the majority of regular Bitcoin users will use the mainchain and self-custody their bitcoin, ideally not on exchanges but on hardware wallets (read more about them here).
What is FastBitcoins doing with the Liquid Network?
Simple. The Bitcoin you buy on FastBitcoins can be delivered to you in L-BTC, removing the need to wait a day to peg-in and be able to use it on the Liquid Network. You will, however, need a Liquid enabled Bitcoin wallet to store your L-BTC, as this is where you can generate a receiving address for your FastBitcoins redemption. We recommend Green Wallet which is a bitcoin wallet that has Liquid Network functionality.
If you want to make Liquid transactions even easier, sign-up to FastBitcoins: https://fastbitcoins.com/get-started