While most of the DeFi and NFT attention has been on Ethereum, Cardano, and others, bitcoin has also been quietly adding this capability.
I say quietly because unless you are heavily involved in bitcoin, you might not have heard of the Liquid Network.
The Liquid Network is the product of Blockstream. Blockstream was cofounded by legendary cypherpunk Adam Back. They are a key player in developing solutions to expand bitcoin’s decentralized financial capability.
The Liquid Network is part of the wider Blockstream product ecosystem. This ecosystem includes a blockchain, satellite system, wallets, and a mining operation.
But the Liquid Network is the piece coming into the spotlight.
The Liquid Network, while relatively unknown, is about to participate in a major financial coup.
And this is because the first bitcoin bonds, issued by the government of El Salvador, will be on it.
Bitcoin’s Layer 2 sidechain
The Liquid Network is an open financial product built on Blockstream’s Elements Blockchain. The network expands the capability of bitcoin by providing the ability to create new digital assets, including NFTs. It is referred to as Layer 2 because it is built to expand the capability of Bitcoin Core.
NFTs on bitcoin? Yes, and it is surprisingly easy to do this.
Other assets on the Liquid Network include stablecoins like USDT (USD Tether) and games.
Liquid also connects to the Lightning Network, where Blockstream has been a leading contributor.
The Liquid Network consists of a federation of skin in the game bitcoin participants. Members include exchanges, wallets, trading desks, and other bitcoin service providers. Governance is through votes by Federation members.
15 of these members make up a unique consensus signing authority. This group of 15, called Liquid functionaries, are geographically diverse, have signing authority, and manage the two-way pegging facility. Functionaries with Hardware Security Models play a key role in security.
This functionary structure is unique to the Liquid Network and is neither Proof-of-Work nor Proof-of-Stake. There is no mining for L-BTC.
In 2022, the Federation will be expanded beyond 15 to make it more secure and dynamic.
Liquid Bitcoin backed by bitcoin
The Liquid Network has its own coin or token called Liquid bitcoin or L-BTC. The coins are backed on a 1:1 basis with BTC and can be converted in and out of the Liquid Network.
When BTC is converted into L-BTC, it is held by the Federation in a Liquid multisig wallet on the bitcoin mainchain.
Conversion is called peg-in or peg-out. Pegging in can be done by any member of the Federation by sending BTC from a Liquid node to a Liquid Federation BTC address.
Pegging out, on the other hand, is the responsibility of the 15 functionaries that provide signing authority. They ensure the conversion back to BTC and the destruction of the subsequent L-BTC. In a way, L-BTC is a bit like a BTC-backed stablecoin.
In order for a peg-in or peg-out to be confirmed, a certain number of blocks have to be completed. Block times on Liquid are set at every minute around the clock.
For a peg-in, 100 block completions confirm the conversion. On a peg-out the block confirmation is 2 blocks. Once confirmation is complete, L-BTC is delivered for a peg-in, or your BTC is available for the peg-out at a confirmed whitelisted address.
It isn’t necessary to peg-in or peg-out to receive L-BTC. There are also options like swaps and direct exchanges to obtain these from other members.
Transactions are fast with confirmation in 2 blocks, and Liquid fees are paid in L-BTC to the network for activity.
Blockstream has a deep bench
Blockstream was founded in Canada in 2014 by a large group of founders. The founders are Adam Back, Gregory Maxwell, Pieter Wuille, Matt Corallo, Mark Friedenbach, Jorge Timón, Austin Hill, Jonathan Wilkins, Erik Svenson, and Alex Fowler. Many of the founders were Bitcoin Core developers, and several were involved in a previous company called Zero Knowledge Systems (ZKS).
Adam Back has long been a part of crypto history as a cypherpunk. He was the originator of Hashcash, a key piece of work leading to bitcoin. He also worked with ZKS, cofounded by Austin Hill.
Gregory Maxwell was a Bitcoin Core developer that has been a major contributor to side chains through the two-way peg. And he is a major part of the development of Confidential Transactions.
Dr. Pieter Wuille was a Bitcoin Core developer who has developed several significant Bitcoin improvements, including Segregated Witness (SegWit).
Matt Corallo is a Bitcoin Core and open-source developer.
Mark Friedenbach is a Bitcoin Core developer behind improvements to make the Lightning Network possible.
Jorge Timón helped design a pre-Ripple Distributed Protocol, Freicoin and Friemarkets. Freimarkets is designed to add financial elements to the bitcoin protocol like interest, options, and atomic swaps. Several of these innovations are available on Liquid.
Austin Hill is an investor who cofounded Zero Knowledge Systems with his brother and father. This company was built around cypherpunk principles and the source of several Blockstream cofounders.
Jonathan Wilkins is an expert in digital security and worked with ZKS, EFF, and Mozilla.
Erik Svenson is a financial industry and startup veteran with two decades in the trenches.
Alex Fowler was an executive at Mozilla, PwC, EFF, ZKS.
Blockstream has a growing product suite
The team raised $20 million in seed funding in 2014. The Elements Blockchain became their first product. It is an open-source blockchain-based sidechain designed to provide development opportunities for the bitcoin ecosystem. Elements is a derivative of the Bitcoin Core software. Liquid Network is built on the Elements blockchain.
Blockstream has gone on to raise a $55 million series A in 2017 and $210 million in 2021.
In addition to Elements, Blockstream has added several other products.
One product is the Blockstream Satellite. This network provides bitcoin users with access to bitcoin even if there is no access to regular infrastructure.
Blockstream has also developed a multi-platform wallet called Blockstream Green and a hardware wallet called Jade. They are currently in the process of developing a bitcoin mining operation using renewable energy.
Other products include Core Lightning for bitcoin’s Lightning payment network. They have also partnered with the Intercontinental Exchange (ICE) to provide a Cryptocurrency Data Feed. ICE was founded by Jeffrey Sprecher, who built an exchange empire, including, most recently, Bakkt.
Creating new assets on Liquid
I had a chance to see a demonstration of the Liquid Network on two occasions.
In one, I was able to see how easy it was to create a new form of currency. This is done directly on Liquid. All you have to do is peg-in your bitcoin, get confirmed, set the parameters of your currency, and pay the fee in L-BTC.
If you create a new currency on the network, it is solely the responsibility of the creator and not the network. And, of course, there may be some regulations you will have to figure out as well.
In another session, I saw how easy it was to create a unique token and transfer it with a QR code.
The same process applies to the creation of NFTs on Liquid. You can see examples of bitcoin NFTs and an NFT art marketplace by looking at Raretoshi.
These two demonstrations showed the power of the concept on bitcoin. But it has remained relatively obscure compared to Ethereum until El Salvador.
El Salvador puts a spotlight on Liquid
El Salvador is the first country to embrace bitcoin as a legal currency. This has been viewed with a mix of adoration and disdain. Regardless of the reaction, El Salvador has continued to move forward with unique world firsts.
They will be the first to set up a bitcoin mining operation powered by a volcano. They will also be the first to issue a bitcoin denominated government bond with funds used to build a Bitcoin city.
And El Salvador’s bond offering will be done on Blockstream’s Liquid Network.
The process of putting half of this billion-dollar fiat equivalent in BTC on Liquid will bring significant attention to the network. The event will also showcase Bitcoin’s DeFi capability.
And putting bonds on Liquid could be seen one day as a form of digital natural selection.
This could prove to be a pivotal event in the unpredictable crypto space for 2022.
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