What is Bitcoin Liquid?

Liquid is a Bitcoin sidechain developed by Blockstream that enables faster and more private transactions as well as the issuance of digital assets. As a second layer on top of Bitcoin, Liquid lets you move bitcoin (BTC) back and forth between the Bitcoin blockchain and a separate Liquid blockchain. This is done through a verifiable one to one peg between BTC and Liquid Bitcoin (L-BTC).

In other words, Liquid is an optional extension of Bitcoin that you can use when its specific advantages are useful.

How does Liquid work?

To use bitcoin on the Liquid network, you first move it into the sidechain through a process called a peg in. You send BTC to a special Bitcoin address that is controlled by the Liquid Federation. Once this transaction is confirmed on the Bitcoin blockchain, the corresponding amount is credited to you as L-BTC on the Liquid network. L-BTC is always backed one to one by the bitcoin that has been deposited. There is never more L-BTC in existence than BTC locked in the peg in address.

You can also bring Liquid Bitcoin back to the Bitcoin main chain. In a peg out, the L-BTC on the sidechain is destroyed and the federation releases the same amount of BTC from its multi signature wallet to your normal Bitcoin address. One important detail is that only federation members can perform peg outs directly. As a regular user you rely on a federation partner such as an exchange or a service provider, or you swap L-BTC for BTC with another user.

Federation instead of mining

Liquid does not use mining like the Bitcoin base layer. The network is operated by a federation of different participants. This federation consists of several Bitcoin companies that jointly secure the network. Around a dozen of these members act as functionaries. They sign new blocks every minute and control the bitcoin that was pegged into Liquid.

Unlike Bitcoin, Liquid produces a new block every sixty seconds. A transaction is considered final after only two confirmations on Liquid. This federation style consensus replaces Bitcoin’s proof of work mechanism. The trade off is clear. The federation must behave honestly and reliably because it occupies a similar role in Liquid as miners do in Bitcoin, only in a much more centralized form.

Confidential Transactions

A key feature of Liquid is Confidential Transactions. Transaction amounts and asset types are hidden by default. Outsiders who look at the public Liquid blockchain cannot see how much L-BTC you send or which token you transfer. They only see that a valid transaction took place. The parties involved in the transaction and others who have the appropriate viewing keys can see the actual amounts and details. This built in privacy protects your financial data from casual observers and most on chain analysis.

Benefits of Liquid

Why would you use Liquid at all? Here are the main advantages.

1. Faster transactions Liquid transactions are typically final in about two minutes. Blocks are produced every minute, so confirmations come quickly compared to on chain Bitcoin.

2. Low fees Fees on Liquid are usually in the cent range. The sidechain is less congested, which makes even large transfers inexpensive.

3. More privacy Because Confidential Transactions hide amounts and asset types, your balances and payments are not visible on a public block explorer. This increases financial privacy and improves fungibility.

4. Tokens and assets On Liquid you can issue and move other assets that are anchored to Bitcoin. This includes things like stablecoins and tokenized securities. All of them benefit from Liquid’s speed and privacy features.

5. UTXO management If you save in bitcoin in many small chunks, for example 50 CHF or EUR every week, you end up with lots of tiny UTXOs on the main chain. Spending those later can become very expensive. With Liquid you could accumulate your savings up to a certain threshold, for example 1 000 CHF or EUR, and only then move the amount to the Bitcoin main chain. That helps keep your on chain UTXO set cleaner and can reduce future fee pain.

Drawbacks

The benefits above come with clear trade offs.

1. Trust in the federation The biggest point is that you must trust the federation. There is no decentralized miner network enforcing the rules. A relatively small group of companies controls the peg in funds and block production. This central element makes Liquid fundamentally different from Bitcoin’s model.

2. Lower decentralization Liquid deliberately gives up some decentralization in exchange for speed and extra features. Only the federation members operate the network nodes that matter. This introduces potential single points of failure. In theory regulators or other actors could pressure or disable certain members. The members are geographically distributed and no single entity controls Liquid completely, but the resilience against censorship and attacks is much lower than on Bitcoin itself.

3. Limited ecosystem The Liquid network is still a niche solution. Only a handful of wallets and services support L-BTC and other Liquid assets. You need compatible tools and some extra knowledge to use it. For most Bitcoin users Liquid is therefore an optional specialist tool rather than the default way to move funds.

How can you try Liquid?

The following wallets support Liquid today:

• Blockstream Green for desktop and mobile
• AQUA as a simple mobile wallet with Liquid asset support
• SideSwap as a wallet and swap tool that lets you exchange BTC for L-BTC To test Liquid, install one of these wallets and create a Liquid address. Using a service such as SideSwap or BoltzExchange you can swap a small amount of BTC for L-BTC and send it to your Liquid address. Once the swap is complete you can send transactions from that address on the Liquid network and see how it behaves in practice.

Does Bittr support withdrawals to Liquid?

From Bittr’s point of view, integrating Liquid is currently challenging because of regulation. As a Swiss provider we must prove for withdrawals to self custodial wallets that the customer really controls the withdrawal address. Under FINMA and VQF rules this is done with technical means such as signing a message with the private key of the address. These processes are built around classic Bitcoin on chain addresses, not Liquid addresses. At the moment Liquid does not offer a standard, widely supported way to sign and verify such ownership messages from a compliance perspective. That means a Liquid withdrawal would add complexity without giving Bittr or its users a clear benefit.

Final Thoughts

• Liquid is a Bitcoin sidechain where you can move L-BTC faster and more cheaply than on the main chain.
• In return you accept trust in a federation that operates the network and controls the peg in funds.
• Liquid increases privacy, supports additional assets and can be useful for UTXO management, but it is an optional specialist tool on top of Bitcoin, not a replacement for holding and using BTC on chain.