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Blockstream’s Liquid Sidechain may Unlock Bitcoin’s Full Potential

Oct 11, 2018

  • Yesterday, Blockstream announced that the long-awaited implementation of its Liquid sidechain for Bitcoin is now live. 23 major cryptocurrency institutions are launch partners of Liquid and will use the new sidechain, including Bitfinex, Coinone, and Zaif -- the 23 major cryptocurrency institutions make up between 50% and 60% of Bitcoin’s daily trading volume.  
  • A sidechain is essentially a separate blockchain that exists outside or ‘next to’ the parent blockchain. The parent blockchain and sidechain are connected through the use of a two-way peg that allows assets to move between the two blockchains interchangeably at a determined fixed exchange rate.  
  • Liquid’s two-way peg works by converting Bitcoin into LBTC, the Liquid Bitcoin Token, at a fixed exchange rate. From there, traders are able to move funds around with higher speed and more security than on Bitcoin’s main blockchain.  
  • Faster transaction speeds in the Liquid sidechain will allow traders to better capitalize on arbitrage opportunities and enable exchanges to maintain tighter spreads in cryptocurrency listings.  
  • It is worth noting that some critics have come out against Blockstream’s Liquid sidechain, calling it, “not innovative.” Liquid relies on a group of trusted third-party users to manage and maintain the sidechain -- in Liquid’s case, those third-party users are its 23 launch partners. This type of sidechain is called a federated sidechain. 
  • The Liquid sidechain also enables its partners to develop and launch tokens on the Liquid sidechain --these tokens can represent crypto assets, fiat currencies, or even financial instruments. Blockstream CEO, Samson Mow, has said that the Liquid sidechain works better than the Ethereum blockchain for launching new tokens. 
  • The official launch of Blockstream’s Liquid sidechain will have a substantial impact on Bitcoin’s scaling going forward. With the implementation of Liquid, Bitcoin may possess the transaction volume potential of payment coins like Ripple while offering an ability for partners to launch tokens, an option previously exclusive to utility coins like Ethereum. Retail traders will reap the benefits of Liquid as well, with tighter listing spreads creating less risk. Liquid is a substantial win for cryptocurrency exchanges, retail cryptocurrency investors, and Bitcoin itself.