Blockstream’s Bitcoin Liquid Network Explained

Liquid, a Bitcoin sidechain by Blockstream,  is a solution for large players like exchanges to quickly tokenize and transfer assets between each other. This helps provide “liquidity” to exchanges/brokers/trading desks/etc.^[1]

The gist of how it works is best explained with Bitcoin. When requested, Bitcoin (BTC) is locked up on the main chain, and then an equal amount of Liquid bitcoin (L-BTC) is issued on the Liquid Network sidechain. That L-BTC can then be sent quickly (within 2 minutes) and changed back into BTC (or simply held as reserve).

This is useful if for example one exchange needs to send another exchange a large amount of assets quickly (big players need to transfer around a lot of Bitcoin quickly due to arbitrage, client requests, and more).

As if the above wasn’t useful enough, Liquid actually allows for any asset to be tokenized in this way. For example, an exchange could tokenize Tether or even fiat dollars using the Liquid Network (see the site for an explanation of tokenizing non-BTC assets with Liquid).

So far 23 exchanges/brokers/etc will use this system off the bat, including Bitfinex and Bitmex. One would assume that more exchanges will adopt liquid over time.

NOTE: This is a positive development across the board as, like with the Lightening Network and SegWit, it means less weight on the main Bitcoin chain.

1. Liquid Goes Live: Blockstream’s First Bitcoin Sidechain Has Finally Arrived. CoinDesk.com.