Liquid network

Liquid is a sidechain of Bitcoin. A sidechain is a blockchain that is attached to a parent blockchain using a two-way peg. A sidechain may have one or many functionalities which are not available on the mainchain itself. With regards to Liquid, there are a few notable features, such as:

1. Faster transactions. Blocks are mined every minute, enabling faster settlements and higher transaction throughput.
2. Confidential transactions. Amounts and assets transacted are kept hidden by default and may only be revealed voluntarily by the user.
3. Secure tokenization. New tokens can be issued by anyone on the Liquid sidechain to represent cash, securities, or other digital assets.
4. Interoperability. All tokens are based on the same standard and can be held in the same wallet.
5. Asset swaps. As multiple assets reside on the same blockchain, exchanging one asset for another can be done in p2p swaps without intermediaries.

Bitcoin used in the Liquid Network is referred to as L-BTC, and each L-BTC has a verifiably equivalent amount of BTC secured by the Liquid members called functionaries.

The peg-in process involves sending BTC over the Bitcoin network to a peg-in address that is controlled by the Liquid federation. After 102 confirmations, an equal amount of L-BTC can be claimed on the Liquid sidechain. The high number of confirmations is necessary to ensure the network isn’t affected in the unlikely event of a chain reorganization on the Bitcoin mainchain.

A peg-in is the only way to issue L-BTC on the Liquid Network.

While SideSwap operates a convenience service assisting users to peg-in to the Liquid Network, for which we charge a small fee, anyone may initiate a peg-in on their own. Blockstream offers a useful guide via the following link: https://help.blockstream.com/hc/en-us/articles/900000632703

The peg-out process involves converting L-BTC on the Liquid Network back to BTC on the Bitcoin mainchain. The process involves sending L-BTC over the Liquid Network, having them “burned” on the sidechain, and releasing an equal amount on the Bitcoin mainchain.

A peg-out requires two confirmations on the Liquid sidechain, after which the BTC can be sent from the Liquid Federations mainchain multisig wallet to a whitelisted address held by a Liquid Federation member performing the peg-out. The peg-out process releases UTXOs on the Bitcoin mainchain non-deterministically. The whole process takes between 15 and 60 minutes.

As a Liquid Federation member, SideSwap is able to perform peg-out’s on behalf of Liquid Network users.

By default, all Liquid transactions use Confidential Transactions, a cryptographic protocol that hides both the type of asset and amount being sent from any party monitoring the Liquid sidechain.

To reveal the transaction details, the user has the option to share the “blinding key” allowing third parties to see the details of any transaction. As a result, Liquid users may transaction with confidentiality while maintaining the ability to share transaction details with third parties at will, for example in a Bisq dispute.

We recommend that you use Blockstream’s explorer. It can be found here: https://blockstream.info/liquid/

Normally, all transaction data on a blockchain is publicly visible. Such data includes the sending and receiving addresses used, the type of asset transacted, the amount of funds that are transacted, as well as a complete transaction history. The Liquid sidechain is designed to resolve these issues by ensuring the confidentiality of a transaction between two parties while maintaining a network that is open to and verifiable by all users.

• All bitcoins are treated as fungible. Peg-ins are permissionless and will not be screened by UTXO heuristics or cleanliness.
• Transactions on the Liquid network are confidential, that is, they do not publicly reveal assets or amounts.
• The Liquid network is currently not serviced by any of the blockchain analysis firms due to difficulty in scoring transactions.
• Peg-outs unlock randomly auto-selected UTXOs from one, or many, multisig peg-in addresses. There is no relation between a peg-in and a peg-out UTXO.