Blockstream has announced Liquid Bitcoin (LBTC) is now available for deposits and withdrawals on Bitfinex as well as for conversion to BTC at a 1:1 peg.
“Issuing bitcoin, stablecoins, and various other digital assets under one blockchain platform makes a lot of sense. It reduces the integration burden for an exchange like ourselves, and traders can manage all their assets from a single wallet application,” Paolo Ardoino, CTO of Bitfinex, says.
Liquid Bitcoin is the bitcoin version that runs on Liquid, a permissioned blockchain controlled by 15 entities comprising mainly of exchanges.
It’s a hardware based sidechain that allows for the pegging of bitcoin and its transfer in a somewhat trusted way from the main bitcoin blockchain to the Liquid sidechain.
The latter boasts of two minutes settlement times, with its main use case appearing to be quicker transfer between exchanges for traders that are engaging in arbitrage.
The chain appears to gradually be opening to the public, with Mario Gibney of Blockstream stating:
“Users can directly send funds to each other using the liquid client (and we’ll soon have support for an easy-to-use mobile wallet). And as more exchanges integrate (as Bitfinex and The Rock Trading already have), then users will be able to deposit and withdraw from those exchanges within 2 minutes.”
Blockstream charges the exchanges that have joined for running the federated peg as far as we are aware, with Liquid seeing very few transactions:
A simple bitcoin transaction is usually about 250 bytes, while here they seem to range from circa 2KB to 4KB.
That’s because liquid has implemented confidential transactions which purportedly increase privacy but at the cost of transactions being far bigger.
According to the whitepaper, the peg is managed by allowing the “parent chain and sidechains do SPV validation of data on each other.”
As you can’t validate the permissioned sidechain, you have to trust the 15 anonymous validators who could potentially collude to steal the funds or freeze them.
This is more useful, therefore, in situations where there is already some level of trust between the parties, like exchanges transacting with each other.
Yet if there is already some level of trust, you can just accept a zero confirmed transaction as confirmed and then do reconciliation because if the transaction is eventually not confirmed for whatever reason then you can just ask for it to be sent again.
That would make transfers pretty much instant, and thus would make arbitrage a lot faster.
A federated peg, however, would provide a bit more security, making this a halfway between o-confirmed and fully confirmed.
Yet it does raise questions about conflict of interest as many bitcoin devs who work for Blockstream might not have much of an incentive to either increase the speed of bitcoin transactions or its capacity.
They do however have an incentive to create sidechains because they can charge for different aspects, including potentially developing them.
That might lead to some innovation, but as a for-profit corporation it is not clear whether they would open source them or keep, at least some aspects, as proprietary.