Sidechains are an ambitious solution to upgrade Bitcoin in several ways, and different companies have been developing the idea since Blockstream introduced the concept in an October 2014 whitepaper.
Simply put, sidechains enable bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. The idea promotes technical and economic innovation, since sidechains are separate systems.
The Blockstream sidechain solution, Liquid, is a commercial sidechain that combines several elements to provide high-speed transactions between Bitcoin Exchanges. The platform has been in testing with a large and growing number of Bitcoin companies since early April. Chief Strategy Officer, Samson Mow, told BraveNewCoin. that they are “aiming for a public launch in Q1 of 2018,” depending on SegWit activation.
“With Liquid in place, we believe Bitcoin will be in a stronger position to attract institutional trading firms and brokerages, as well as address global liquidity and pricing data challenges faced by these players interested in bitcoin as an asset class. That will be a major milestone for Bitcoin, bringing many new users and applications to the industry.” - Samson Mow
Liquid reduces delays when moving bitcoin between accounts in different locations by allowing rapid transfers between accounts held by the varied participants in a separate, high-volume and low-fee cryptographic system that preserves many of the security benefits of the Bitcoin network.
The major customer-facing innovation Liquid offers is a special wallet where customers can securely hold their liquid bitcoins, in a way that allows them to move those coins very quickly. “Liquid provides a more secure and efficient system for exchange-side bitcoin to move across the network,” Mow explained.
Another feature of Liquid is the fungibility-preserving privacy option. Using the TOR privacy-routing network, there are at least three types of transactions users can make, according to Mow. “End users will see actual bitcoins that move around on the sidechain, with each Liquid address starting with the letter X if confidential, and Q or H otherwise; the expectation is that the majority of usage will be confidential, and that is the default,” Mow detailed.
Director of Product, Ben Gorlick, provided an example use case for commercial transaction privacy, that would make use of the privacy network and confidential transactions. He pointed out big whales and Wall Street firms will want to move bitcoin between their accounts at different exchanges, ”without broadcasting the amounts to the general public, providing assurances that their trading strategies and holdings are not exploited by potential adversaries.”
“Like Bitcoin, Liquid transactions are viewable by everyone in the network, so Confidential Transactions hides transaction amounts from everyone except for the parties directly involved in the transaction itself. In doing so, it minimizes front-running risks that occur through blockchain analysis.” - Ben Gorlick
The sidechain depends on a distributed group of “signatories”, or functionaries, to create blocks, as opposed to the Proof of Work system found in Bitcoin. These functionaries are hardened black boxes that enforce the rules of the network as long as they are connected to the Internet. Blockstream distributed these functionary boxes across the world to a number of participants, known as “the functionary grid.”
“There are no Blockstream-run servers required for the day-to-day running of Liquid,” Gorlick noted. “The servers running the Liquid network are hosted by the participating exchanges.” While structured as a federated network, and therefore not completely decentralized, “no single party, including Blockstream, can control the Liquid network, and furthermore, no single entity is in control of more than a single Liquid functionary server.”
The first version, v1.0, supports up to 15 of these functionary servers, “each securely hosted by geographically dispersed, independently owned and operated bitcoin exchanges,” he shared. “Several can go down without impairing the system's ability to operate, and even if the system stops operating, there are multiple recovery systems for ensuring that customer funds are not lost.”
Other sidechain projects in the space have been designed to fill other niche needs, so Mow doesn’t view them “as competing products.” A link to the RSK (Rootstock) project is prominent on the sidechains page of Blockstream’s website. “Rootstock and Drivechain utilize the two-way peg invented by Blockstream,” while “all three leverage sidechain technologies to move asset value between different blockchains.” However, the three “approach implementation of that functionality in different ways.” Of the three, Liquid will be the first to full production, he clarified.
“Liquid is much further along as it’s a production-grade sidechain, having been peer-reviewed, alpha and beta tested for over a year by end users, and its codebase has been audited by an independent security firm.” - Samson Mow
The limitations mostly fall on the shoulders of the federation members. Since they are responsible for transferring bitcoins into and out of the Liquid network. They'll also be paying the bitcoin transaction fee and the Liquid transaction fee for each use, according to Glenn Willen, the Liquid Engineering Team Lead. The round-trip time of going from Bitcoin to the sidechain and back will be “about a day,” which he stresses is “not something that end users need to do, as these activities are performed by the Liquid functionaries.”
There are size constraints as well. The maximum size of confidential transactions is planned to be nearly 700 BTC in the production Liquid network, Willen divulged, although the size of regular (non-confidential) transactions is not limited in any way. “We expect almost all transactions to be confidential,” he added. Meanwhile, there is no minimum size restriction, but the team acknowledges that Liquid will not be cost effective for small payments, including a cup of coffee. “For merchants and micropayments, it would probably better to use Lightning instead of Liquid,” Mow explains.