One of the biggest issues facing bitcoin is scalability and speed. The underlying technology of bitcoin is not particularly fast and cannot process many transactions at once. This is a problem for the world’s most popular cryptocurrency.

One solution is the Layer-2 blockchain protocol, which effectively adds another processing layer to the original blockchain to increase capacity. The Bitcoin Liquid sidechain is a layer-2 protocol that aims to solve bitcoin’s scalability and speed issues, but how does it work, and how can you use it?

What is a sidechain?

A sidechain is a type of layer-2 blockchain that is attached to the main blockchain to help process some data in the main blockchain. This enables the mainnet to grow its ecosystem by processing certain transactions securely and quickly. In this case, the bitcoin blockchain is layer-1, and the bitcoin liquid sidechain is layer-2. There are other differences between layer-1 and layer-2 blockchains as well.

This makes it safe to transfer digital assets such as tokens between blockchains, and it improves the privacy and security of the main blockchain by reducing the trust required to keep the network running.

Sidechains are more centralized than the mainnet and are responsible for their security, a trade-off for the speed they achieve. They also require their own validators or miners, but can adopt any consensus mechanism, whether proof-of-work, proof-of-stake, or even proof-of-space-time. Sidechains are not required to use the same consensus mechanism as the main blockchain, which can help speed up processing.

For sidechains to operate effectively, that is, to transfer digital assets to and from the mainnet without allowing duplication, two things are needed: a two-way peg and smart contracts.

Two-way peg

Two-way pegs are a mechanism that enables the transfer of digital assets between two different blockchains. It involves a two-way, counter-directional process: locking up mainnet assets in sidechains and releasing sidechain assets to mainnet. So how does the double sided peg work?

The Liquid sidechain two-way peg allows you to lock up an asset on the mainnet and then mine an equivalent amount of that asset in the sidechain. When assets need to be transferred from the sidechain back to the main chain, they are destroyed, and an equivalent amount of the asset is minted into the main chain.

This creates a direct bridge between the two, allowing interoperability. Essentially, no “transfer” actually takes place. This means that the “validators” involved in the operation are considered to be acting in good faith.

Smart contract

The whole idea behind blockchain technology is to make it trustless. Validators in a two-way pegged transaction process cannot be humans, which is where smart contracts come in.

Smart contracts confirm that digital assets locked and issued in the blockchain correspond to each other in value. They do this by implementing validators on the sidechain, and the mainnet acts faithfully when verifying cross-chain transactions.

Essentially, when a transaction occurs on the sidechain, a smart contract notifies the mainnet about the event. The transaction information is sent to another smart contract on the sidechain to verify the transaction.

After verification, the representative digital assets in the sidechain are destroyed, and the equivalent digital assets in the mainchain are issued to you. This process can happen in both directions.

What is bitcoin liquid sidechain?

Bitcoin Liquid, also known as Liquid Network, is a sidechain designed to offer a solution to the privacy and scalability limitations of the Bitcoin blockchain.

Unlike bitcoin, where blocks are mined with a proof-of-work mechanism, bitcoin liquid assigns each block to specialized hardware units known as “functional nodes”, which sign transactions. Generates new blocks, and secures bitcoins attached to the mainnet.

To achieve better privacy, the Liquid network uses tokens with transaction volumes, and obscures asset types using cryptographic techniques. These assets allow the network to support confidential transactions, resulting in greater privacy.

Meanwhile, Liquid Network achieves scalability through its support for two-minute block times, which is significantly faster than bitcoin’s ten-minute block times. This allows for faster trading and settlement of assets on the network.

Who Controls the Bitcoin Liquid Sidechain?

Bitcoin Liquid was created by Blockstream, which was founded in 2014 by Adam Black to develop products and services for the storage of digital assets.

Currently, it is managed by a consortium of 63 trusted entities known as “liquid fiduciaries”, which include financial institutions, cryptocurrency exchanges and other bitcoin-based businesses.

Leave a Reply

Your email address will not be published. Required fields are marked *