In-depth analysis BTC sidechain Liquid, how to improve the participation of ordinary users? "BTC Ecology"

Original author: DaPangDun

1.Reason for writing

In the early days of research on the BTC ecosystem, I looked at the sidechain network, and at that time, based on the judgment of “insufficient originality”, there was no detailed research, focusing on the research of the RGB protocol. A few days ago, the project team of pprgb and I discussed whether there is a possibility of “mapping” the distribution on Liquid, and then the research found that there is a “bridge” code between the RGB protocol and Liquid, although I have not tested it, but I found that the code has been there for a long time, indicating that it has been on the roadmap for a long time. Therefore, I began to study Liquid, and gradually understand its principles, technical characteristics, ecological status, etc., before I came to this article.

This article can only be used as a “shallow talk”, because Liquid came out very early, belongs to the category of “ancient protocol”, I don’t have much time to research, and there must be a gap with the understanding of OG under this protocol, so this article is only recorded as a “study note”.

2. Meet Liquid

2.1 Overview

Liquid is a BTC layer-2 settlement network based on the idea of sidechains, which aims to connect cryptocurrency exchanges and institutions more effectively, enabling faster and more confidential BTC transactions and the issuance of digital currency assets.

2.2 The concept of sidechains

In the early BTC scaling controversy, two ideas emerged: one was the big block (if the TPS was not enough to make the block bigger), and the other was to make various attempts outside the BTC to anchor or hook up to the original chain in some way, and the sidechain was one of them.

A sidechain is a mechanism by which tokens from the original blockchain (in this case, the BTC of the BTC main chain) are securely used on a separate blockchain (in this case, Liquid), with new rules, performance requirements, and security mechanisms.

In this way, when it is necessary to do some new function tests with security risks in the original chain, or test new functions that cannot be implemented in the original chain, it can be carried out in the sidechain.

Of course, in order to ensure the anchoring of the original chain and the sidechain, there will be a two-way peg mechanism to anchor the main token.

Liquid is one of the BTC’s sidechains that allows users of the Liquid network to move BTC between the two networks through a two-way peg. The BTC used in the Liquid network are known as L-BTC, and each L-BTC is backed by a verifiable equivalent number of BTC, guaranteed by Liquid members known as Functionary.

The figure above shows the process of the main chain BTC entering the side chain through Peg-in and converting it into L-BTC, and then transferring from the sidechain to the main chain through Peg-out, and the intermediate process is guaranteed by Functionary.

2.3 What can we see from the definition

1. Liquid is more inclined to connect with standardized exchanges and institutions rather than ordinary retail investors; This can also be seen more clearly from the partners on the official website.

2. Assets issued on Liquid are also generally more compliant real-world assets (because the usual demand from large institutions and investors is not meme tokens, etc., but based on real-world asset forms)

3. Liquid features and simple technical principles

Compared to traditional BTC trading, Liquid offers a lot of features

3.1 Settle quickly and deterministically

1. The BTC transferred to the Liquid sidechain can be settled within 2 minutes, which is much shorter than the main chain transfer

2. The block time of Liquid Network is one minute, which greatly improves the transaction confirmation speed compared to the BTC main chain

3. The Liquid network only needs 2 blocks to confirm a transaction, which is much lower than the 6 blocks required by the BTC main chain

3.2 Confidential Transactions

3.2.1 Concept of Confidential Transactions

The default transaction on Liquid is a “confidential transaction” that hides the amount and type of assets traded, keeping the user’s financial data safe.

This privacy enhancement was proposed by Adam Back in 2013 and later formalized by Gregory Maxwell, Andrew Poelstra, Adam Back, Mark Friedenbach, and Pieter Wuille.

Confidential transactions on Liquid allow either two parties to trade, while no one else can see the assets (e.g., L-BTC, L-USDt) and the amount of the transaction (even Liquid Alliance members and staff can’t see this information). This kind of privacy can avoid the tracking of large transactions by on-chain analysis software, which can expose one’s own transaction intentions.

Of course, because the assets on Liquid fall within the scope of regulatory requirements, including basic service providers, etc., these may be required for KYC; Some projects may require KYC when Peg-out to the main chain due to regulatory or anti-money laundering measures. However, for most people, the vast majority of operations are optionally confidential.

3.2.2 Blinded and unblinded data

Technically, Liquid refers to “the process by which the number and type of transferred assets are cryptographically hidden from everyone as ‘blinding’”, and only the recipient can decrypt the amount sent in the transaction.

Of course, the receiver can choose to share the private blinded key of a particular transaction with any third party he trusts so that party can verify the amount and the type of asset.

So, in Liquid’s trading, in the explorer of some products, we see the difference between “blinded data” and “unblinded data”.

The above figure is the “blind data” of a transaction, we can only see that there are inputs and outputs, but we can’t see the specific assets and amounts, which is also the data status that others see

The picture above is the display of the blind data after the “non-blind”, here I can only see my own input and output, the input is three L-BTC, the output is to get 9 PPRGB, and there is an L-BTC return; For the counterparty, his “unblinded data” is the remaining confidential part

3.3 Diverse Asset Offerings

Liquid allows individuals, institutions, project parties, companies, etc. to issue a variety of digital assets, including: tokenized fiat currency, tokenized non-BTC cryptocurrency, digital collectibles, reward points, and certified assets.

3.3.1 Asset Registry

Assets that have been issued in Liquid are given a unique identifier (64 hexadecimal characters) when they are created. This is the unique identifying information of the issued assets that are clearly recorded on the Liquid blockchain. Any additional human-readable metadata that can simplify the identification of issued assets at the UI level, can be submitted during issuance, and published on a server such as the Asset Registry. Metadata that can be linked to an asset contains:

• NAME asset name
• TICKER TICKER THE TICKER YOU WANT TO ASSIGN TO THE ASSET (OPTIONAL)
• DOMAIN is the domain used to verify the asset
• ASSET AMOUNT to be issued
• TOKEN AMOUNT The number of reissued tokens to be created
• PRECISION IS USED TO DISPLAY ASSET AMOUNTS IN APPLICATIONS THAT USE LIQUID ASSET REGISTRY DATA
• PUBKEY holds the value of the public key that goes into the Issuer_pubkey registration data field. The Asset Registry uses this data field to verify ownership when registry data is deleted or updated in the future
• COLLECTION is an optional field used to associate a set of uniquely issued assets, often helpful for NFT collections

Assets issued on Liquid can be “re-issued” or “burned”, which can be understood as the concept of asset contract upgrade in “RGB”, which usually needs to be set up and confirmed through the “m of n” multi-signature scheme

3.3.2 Stablecoin (tokenized issuance)

In this case:

1. Fiat currency is deposited into a bank account and held in escrow by the issuer

2. The issuer generates tokens in Liquid that represent the amount in the account and distributes the tokens to the depositors of the account

3. If the owner of one of these tokens wishes to receive fiat currency in return, he can redeem it through the issuer. The issuer can then burn the tokens and maintain an equal supply of fiat currency and outstanding tokens

4. The issuer can certify to any auditor or regulator that the number of outstanding tokens always corresponds to the bank account balance

5. Issuers also have the option to use Liquid’s scripting capabilities to comply with different regulations around the world without adding any human requirements to staff.

USDt

Tether’s stablecoin has been issued on the Liquid network, and as a stablecoin, it participates in various exchanges of Liquid’s ecological protocol, and we can see the situation of the stablecoin through Mempool.

L-BTC and stablecoins can currently be withdrawn directly to the Liquid protocol via Bitfinex.

3.3.3 Tokenizing other currencies (financial currencies or cryptocurrencies)

For example:

1. Blockstream Mining Note and El Salvador Bitcoin Bond

2. Various tokens on SideSwap

Liquid members can create tokens that represent staked cryptocurrencies. These tokens can now be traded and settled between Liquid users with the same speed and privacy as BTC and other issued assets. This approach also allows exchanges and traders to safely handle these assets without having to support the underlying asset. This opt-in model allows users who wish to benefit to work with parties they trust to issue and secure an asset without requiring the entire alliance to know about the asset.

3.4 Transfer funds quickly

For exchanges, using Liquid can provide their users with the ability to deposit and withdraw funds quickly and privately. The implementation logic is as follows:

1. The exchange will hold a portion of the funds on the Liquid network

2. When a user wishes to make a deposit on an exchange, they will request the exchange to generate a Liquid deposit address on their behalf

3. The client then takes the address to another exchange and requests to withdraw Liquid

4. The sending exchange will deduct the client’s balance and send the funds via Liquid to the receiving exchange. When a transaction receives two confirmations, the receiving exchange can deposit funds into the user’s account without the risk of double spending

5. The entire process is usually completed in less than three minutes after the original transaction is sent

This mechanism is mainly for institutional traders or arbitrage traders, and it allows institutional funds to be quickly transferred to any exchange that supports Liquid deposits, realizing trading opportunities. And it will transfer the custody risk of institutional funds from a single exchange to the entire Liquid Alliance.

4. Engage in roles

Liquid is governed by its federation of members, the Liquid Federation, which includes major exchanges, trading desks, wallet providers, payment processing services, financial institutions, and other significant companies in the Bitcoin space, which are geographically and geopolitically dispersed around the world. Each member does not have a single control, and they ensure network security through multi-signature smart contract collaboration.

For Liquid users, there is always the ability to self-verify activity on the network with a Liquid full node.

The diagram below shows the governance structure and the responsibilities of each part

5. Parent company

5.1 Overview

The parent developer of the Liquid Network is: blockstream

Founded in 2014, Blockstream has been a leading provider of blockchain technology with a mission to build crypto financial infrastructure on top of the most powerful and secure blockchain, the BTC.

The CEO of the company is: Dr Adam Back

Blockstream is a diversified company that has gone through multiple rounds of heavyweight funding, and its products cover many different aspects

5.2 History

• Blockstream was founded in 2014 by Adam Back, Erik Svenson, Pieter Wuille, and others
• November 2014 Seed round, $21 million invested
• June 2015 The first version of Elements was officially launched (an open-source platform for developing sidechains)
• Series A funding in February 2016 with $55 million in funding
• July 2016 Acquired GreenAddress, a BTC wallet service provider
• In April 2017, the privacy assets feature was launched
• Blockstream Satellite was officially launched in August 2017
• In November 2017, Digital Garage invested in Blockstream, raising more than $80 million in total
• In December 2017, Blockstream’s Lightning Network deployment, c-lightning, went live
• Lightning Charge launched in January 2018, making it easier to develop apps on the Lightning Network
• In October 2018, the Liquid Network was launched by Blockstream in conjunction with the world’s largest crypto exchange and trading desk (Liquid only came into existence at this time)
• Blockstream Green Wallet went live in March 2019
• July 2019 Liquid Network is supported by the Lightning Network
• Blockstream Mining was unveiled in August 2019
• As of January 2020, the Liquid network supports BTCPay Server
• In March 2020, the number of Liquid Alliance members reached 45
• Launched in May 2020 with Blockstream Satellite 2.0, Ledger supports the Liquid Network
• In July 2020, the number of Liquid Alliance members reached 53
• Launched the Blockstream Asset Management Platform (AMP) in October 2020 with support for programmable security tokens on Liquid
• Launched Blockstream Jade in January 2021, a fully open-source hardware wallet
• The number of Liquid Federation members increased to 59 in January 2021
• Introducing Blockstream Mining Note (BMN) in March 2021
• In March 2021, Galaxy Digital leveraged Blockstream to provide mining hosting services
• May 2021 Acquisition of Adamant Capital and formation of Blockstream Finance
• June 2021 Announced a partnership with Block Inc. to build an open-source, solar-powered BTC mining facility in the United States
• Acquired Spondoolies in August 2021 with plans to build the world’s first enterprise-class mining rig
• Received $210 million in Series B funding in August 2021 at a valuation of $3.2B
• The number of Liquid Federation members increased to 63 in January 2022
• In April 2022, BMN was listed on the global stock exchange MERJ
• Construction of the solar BTC mine began in April 2022, with TSL solar and battery infrastructure powering the mine
• In February 2023, Blockstream announced the launch of the new Blockstream Research brand
• August 2023 announced the launch of Blockstream’s new “BASIC Note” investment vehicle to bet on the recovery of the ASIC market
• In October 2023, Blockstream launched Greenlight for scalable, unmanaged lightning integration

From the perspective of the development process, the rhythm is very good, and it is not bad for money, multi-line advancement, and orderly

6. Liquid Eco Project

The ecological infrastructure projects on Liquid are very complete, including wallets (custodial, non-custodial, plug-ins, mobile, desktop), NFT marketplaces, trading platforms, lending platforms, asset issuance platforms, compilers and other related auxiliary tools.

7. Feelings

7.1 About Liquid

On the whole, the ecological projects on Liquid are very complete, the protocol itself has been continuously developing, the docking formal exchanges and institutions are also expanding, and the financing amount is also very dazzling.

The overall product architecture and development process show an obvious regular army rhythm, multi-line advancement, and step by step expansion.

However, judging from the prosperity and transaction frequency on the sidechain, the frequency of use is very low, and I guess it is because it is positioned in professional institutions and companies, so that ordinary retail investors have little participation. If there are few people researching, then the relevant tutorials will be less popular, resulting in a simple account that many people may not be able to figure out.

As the BTC ecosystem develops into one of the main narratives of this round, I think this kind of sidechain protocol will enter the field of vision of ordinary retail investors; Perhaps officials can think about some marketing behaviors (although they may not care about these for companies at this level) to facilitate the participation process of ordinary users.

7.2 Liquid vs RGB

Although the implementation paths of the two are very different, there are many similarities, such as:

1. Emphasis on privacy. Liquid’s “confidential transactions” are a major feature, and RGB’s extreme privacy is also an important attribute;

** 2) The implementation is functionally similar. ** can improve the speed of network transactions and confirmations, can issue multiple types of assets, can deploy smart contracts, can be connected with the Lightning Network, and are designed to develop in the direction of compliant assets.

** 3) does not destroy the original chain. ** Many foreign BTC old OG tend to maintain the “cleanness” of the BTC main chain, and all the expansion is carried out as much as possible without destroying the characteristics of the original chain, whether it is a side chain or off-chain verification, it will not interfere with the operation of the original chain, in principle, I agree with this concept.

RGB In the core code, there is already a bridge code with Liquid, maybe in the future we can see “Liquid+RGB”

8. Reference Links

1. Liquid’s official website

2. Blockstream’s official website

3. Liquid network whitepaper

4. Liquid Developer Documentation

Link to original article