Despite rising to the top of the cryptocurrency industry, there are still a number of issues preventing Bitcoin from being widely used. Bitcoin’s low throughput—the blockchain can only handle 5-7 transactions per second—is the largest of these issues. In comparison, thousands of transactions can be processed simultaneously by centralized payment systems like Visa.
Institutional investors, particularly those engaged in cryptocurrency arbitrage, are put off by Bitcoin’s slow transaction speed. Since it degrades user experience and liquidity, retail customers can also find the protracted transaction confirmation periods off-putting.
Big buyers have additional challenges as a result of Bitcoin’s transparency. Address balances and transaction amounts in Bitcoin are visible to all parties. For institutional buyers, this raises privacy concerns and increases the possibility of front-running huge orders.
These issues have been addressed by a number of techniques, including layer-1 and layer-2 solutions.
For Layer-1 solutions to incorporate modifications, such larger block sizes or faster block times, the blockchain protocol must be rewritten. Although faster block times and larger block sizes could speed up transactions, they often have an impact on network security and decentralization. This is the reason behind the SegWit2X proposal’s rejection by the Bitcoin community, which resulted in the hard fork that produced Bitcoin Cash.
Nevertheless, Layer-2 solutions don’t modify the network protocol; instead, they function on top of the primary blockchain. Layer-2 networks, sometimes referred to as “off-chain” solutions, manage transactions that are not part of the main chain. Transfers that are carried out off-chain are combined and added to the main chain in order to maintain the security and immutability of the transactions.
Liquid Network, Lighting Network, and Root-stock are well-known instances of layer-2 solutions created for the Bitcoin network. This piece mostly discusses the Liquid Network and how it affects the Bitcoin network.
What Is The Liquid Network?
A sidechain based on the Bitcoin blockchain is called the Liquid Network. Sidechains are layer-2 networks that use a “two-way peg” to communicate with the main chain. One can use tokens and coins on another blockchain by using sidechain assets, which are valued at a ratio of 1:1 to the native assets they represent.
The purpose of the Liquid Network is to facilitate the quick, private, and safe issuance, transfer, and exchange of digital assets, security tokens, stablecoins, and cryptocurrencies on the Bitcoin network. Even though Liquid Network runs on top of Bitcoin’s foundation, it is a separate system that employs several techniques to provide more private and faster transaction throughput.
Liquid Network caters mostly to enterprise clients that require speedier transactions and enhanced secrecy, such as exchanges, cryptocurrency traders, and institutional investors. It is not possible for retail investors to use the Liquid Network directly; instead, they must go through one of its members.
How Does Liquid Network Work?
L-BTC, or “wrapped” Bitcoin, is essentially what Liquid Network offers for use on its network. Users must transmit Bitcoin to a Lightning Network address on the Bitcoin blockchain in order to start a “peg-in” in order to use Liquid Network. On the Liquid Network, an equivalent amount of L-BTC is created and delivered to the user’s address after the transaction achieves 102 confirmations.
Owners of Liquid Network Bitcoin (L-BTC) are allowed to use their tokenized Bitcoin anyway they see fit. With it, they might purchase assets and digital collectibles issued on the chain or trade on an exchange that works with Liquid.
A user must first conduct a “peg-out”—which entails transmitting L-BTC to an address that can never be recovered—in order to withdraw their Bitcoin. The original Bitcoin is sent to the user’s address on the Bitcoin blockchain by a Lightning Network member after this transaction has received two confirmations.
In contrast to Bitcoin, Liquid Network generates new blocks in a different way. Blocks of transactions are assembled and signed by the fifteen Liquid Network Functionaries. In addition to operating complete nodes, these Functionaries broadcast new blocks to the chain and validate incoming transactions.
To further improve the secrecy of Bitcoin transactions, Liquid also employs Confidential Transactions. Important transaction information is concealed by this feature, including the amount sent, the parties involved, and any balances remaining in the users’ addresses. Nevertheless, wallet balances, transaction amounts, and total supply can still be verified by network validators.
Advantages of Using Liquid Network
Transaction validation and processing times are shortened by Liquid Network’s use of Signed Blocks. Unlike adding a block to the Bitcoin network, which takes ten minutes, new blocks are confirmed in about two minutes.For arbitrage traders who must execute cross-exchange deals rapidly in order to turn a profit, liquid is a great option due to its faster transaction times. For these kinds of people, Bitcoin is not the best option due to its lengthy confirmation time, which can cause trading advantages to disappear in a matter of minutes.
On enabled exchanges, retail investors can deal using L-BTC for speedier transactions without having to convert their Bitcoin into riskier altcoins. They can thus take use of the security provided by the Bitcoin network while making instantaneous transactions and asset purchases.
Bitcoin was created by Satoshi Nakamoto as a kind of public ledger. Transparency is increased because anyone can verify wallet balances and link transactions to specific addresses.
That transparency, meanwhile, can be problematic for businesses, particularly those handling big transactions. Front-running is the practice of a third party obtaining a competitive advantage in the market by using information obtained by analysing transactions. For investors, front-running is detrimental and deters them from using Bitcoin.
To keep important transaction details hidden from others, Liquid Network uses Confidential Transactions. As a result, for transparency, just the transaction fee, sending address, and receiving address are recorded on-chain. All other information, like the kind and value of the asset, is only visible to the parties engaged in the transaction.
Reduced Transaction Fees:
Lower transaction fees are an unintended advantage of Liquid’s increased throughput. In order to prioritise certain transactions, miners will impose higher fees when the Bitcoin network becomes overloaded with unconfirmed transactions. In the past, particularly during bull runs, this has led to a surge in Bitcoin transaction costs.
Because Liquid uses a revolutionary consensus mechanism called block signing, users can execute transactions more quickly without paying more. Retail and institutional investors that wish to trade Bitcoin without utilising other blockchains might find Low Liquid Network fees to be perfect. While less expensive transaction fees may be promised by newer networks, Bitcoin’s security and liquidity are not available with them.
Trustless Atomic Swaps:
People can swap cryptocurrencies using atomic swaps instead than depending on exchanges or other reliable middlemen. The open-source Liquid Swap utility allows Liquid users to do peer-to-peer, trust-less Atomic Swaps.
For instance, on the Liquid Network, users can trade tokenized versions of USDT (L-USDT) and BTC (L-BTC). This may increase an entity’s liquidity and facilitate the exchange of Bitcoin for other assets.
Issuance of Assets:
With Bitcoin’s restricted capability, Liquid Network makes it feasible to issue digital assets, something that would not be possible with Bitcoin. On Liquid, users can issue, purchase, and swap the following assets: stablecoins, digital collectibles (NFTs), utility tokens, and security tokens.
Limitations of the Liquid Network:
Fifteen Functionaries are in charge of adding new transactions and keeping the ledger up to date in the federated system that the Liquid Network operates. Although there is a reduction in confirmation time with this approach, it is very centralized and controlled by a small number of people.
Liquid’s single points of failure are the subject of additional worries. Because hundreds of nodes—computers that support the network—make Bitcoin impossible to take down or attack. Because Liquid depends only on 15 computer hubs, there is a greater chance of censorship and hostile assaults.
Liquid Network vs Lightning Network
Layer-2 networks like Liquid and Lightning Network run on top of the Bitcoin blockchain. Nevertheless, the objectives of various off-chain alternatives differ. Bitcoin micropayments are made possible by Lightning, but large-scale Bitcoin transactions are the emphasis of Liquid.
Liquid and Lightning have different target users as well. When processing Bitcoin payments, small businesses have found Lightning Network’s payment channels to be extremely helpful. Liquid, on the other hand, is used by businesses like financial institutions and cryptocurrency exchanges to carry out speedier and more confidential transactions.
Who Controls the Liquid Network?
Block stream, a blockchain solutions business led by Adam Back, is the creator of Liquid Network. Back was one of the few persons Satoshi Nakamoto contacted while working on Bitcoin and created Hashcash, which served as inspiration for Bitcoin’s proof-of-work consensus.
Although Block stream founded Liquid, the Liquid Network Federation is in charge of maintaining the network. The 15 validators, or “Functionaries,” regular members who have the ability to vote on network changes, and nodes that confirm the network’s current status make up the Liquid Federation.
The network can be monitored by anybody running a Liquid node, but only the 15 Functionaries operating complete nodes are able to add new blocks. To achieve some degree of decentralization, this role is periodically cycled among Federation members.
Ping-in and peg-out transactions (changing BTC to L-BTC) can be processed by any member of the Liquid Network Federation, not just Functionaries. Federations must maintain pre-funded wallets on Liquid and Bitcoin in order for users to promptly obtain their wrapped or unwrapped assets.
The Liquid Network has become a well-liked method for expanding the Bitcoin network and modifying it to meet business requirements. Without altering the core protocol, Liquid enhances Bitcoin and gives consumers more functionality without compromising security.
In addition, Liquid gives Bitcoin tokenization, interoperability, and programmable functionality. This might make it more formidable against Ethereum, Solana, Cardano, and other more recent competitors and maintain its position as the top blockchain globally.