Liquid Network — A Bitcoin Scaling Solution
Liquid Network is a Bitcoin layer-2 solution developed by Blockstream, which provides various features desired by app developers and end users while remaining compatible with the BTC blockchain. More specifically, Liquid is a sidechain that maintains a 1:1 peg between BTC and L-BTC. The latter, L-BTC, is the token that powers the Liquid sidechain. To generate L-BTC, a user would deposit BTC at a 1:1 ratio and receive L-BTC which can then be used by the various apps, exchanges, wallets, etc. running on Liquid.
Some of the features that differentiate the Liquid sidechain from the Bitcoin mainchain include the following (quoted directly from Liquid documentation):
Fast, Final Settlements: Bitcoin moved to the Liquid sidechain (Liquid Bitcoin, “L-BTC”) can achieve final settlement within two minutes.
Confidential Transactions: Amounts and type of asset transacted are hidden by default on Liquid, keeping users’ financial data safe.
Secure Tokenization: New tokens can be issued on the Liquid sidechain (Issued Assets) to represent fiat, securities, or other digital assets.
Interoperability: One Liquid integration provides support for both L-BTC and Issued Assets. All tokens are based on the same standard, allowing users to take advantage of features such as atomic swaps and Bitcoin-style multisig.
Liquid sidechain’s settlement time is relatively fast compared to the roughly 10 minute frequency of new blocks appended to the Bitcoin mainchain. Additionally, it should be noted that the Liquid network is secured using a federated blockchain approach consisting of participants that represent "exchanges, financial institutions, and other Bitcoin-focused companies." The full list of Liquid network members can be found on the liquid.net website. Also viewable is a steady uptrend of L-BTC on the sidechain which, due to the 1:1 peg to BTC, represents an equivalent amount of BTC locked in the Liquid network.
On 4/24/22, the Liquid website showed that 3,539 L-BTC were in circulation which equated to a Total Value Locked (TVL) of roughly $141 million USD. Then, a second check-in on 7/29/22 showed 3,569.8 L-BTC in circulation - an increase of less than 1% L-BTC over a 3-month period. While the rate of growth was low, it is unsurprising since we transitioned into a bear market during that time period causing the TVL to drop to about $87.1 million USD even though the total L-BTC on the Liquid sidechain slightly increased. If we zoom out, we see rapid adoption from December 2019 to April 2020, followed by steady growth, as depicted in the graph below.
L-BTC in Circulation sourced from liquid.net
According to defillama, the approximately $85.7 million TVL on the Liquid network is less than the $106.3 million TVL on the Lightning Network - a different BTC Layer-2 solution. Lightning network not only achieves its Layer-2 solution very differently than the Liquid network, but the target audience is also vastly different. Lightning is optimized to support retail (point-of-sale) transactions, whereas, Liquid is optimized for medium to large wallet-based or institutional transactions. The table below, from liquid.net, highlights six areas where Liquid and Lightning differ.
Lightning vs Liquid, sourced from liquid.net
A more comprehensive comparison of the two Bitcoin layer-2 solutions can be found in this liquid blog.
While attending this year’s BTC 2022 conference in Miami and thinking about the difference compared to last year’s BTC 2021 conference, it was apparent that BTC Layer-2 scaling was a hot topic. And, the common use case centered around retail transactions. This was not too surprising since it’s becoming a conference tradition for the Lightning network to capture a lot of attention via Jack Mallers’ keynote announcements, and the onboarding of retail is important for mass adoption of BTC as a payment rail. However, digging into Blockstream’s Liquid network unveiled a robust BTC Layer-2 solution that supports non-retail use cases, such as exchanges and private wallets transfers, while remaining compatible with the Lightning network. A Bitcoin Layer-2 solution that supports the needs of institutions and governments is critical to the growth and large-scale adoption of Bitcoin as a whole, making the Liquid network critical infrastructure within the Bitcoin ecosystem.
