Nearly one year after the release of its sidechains white paper, bitcoin technology startup Blockstream has announced the first commercial application of the technology.
Dubbed Liquid, the unlaunched offering will serve bitcoin exchanges, payment processors and traders by reducing the time in which bitcoin-denominated funds can be transferred between accounts at these institutions.
Five major bitcoin startups – Bitfinex, BTCC, Kraken, Unocoin and Xapo – will operate the private sidechain, allowing partner exchanges to move funds between order books without the need to transfer funds on the bitcoin blockchain.
Blockstream CEO Austin Hill explained:
"The capital requirement of maintaining balances at all these exchanges is high for today's traders. [They say] 60–70% of the trades they could make, they can't take advantage of because of the settlement lag."
Hill contends that Liquid will reduce the time it takes funds to move between exchanges from 60 minutes to seconds.
"That in of itself is the simplest use case," he added.
The startups involved will participate in the operation of the sidechain, but at the same time will be customers of Blockstream, paying an undisclosed monthly subscription fee. Hill suggested that the effort is the first of what could be many commercial sidechains offerings, both from Blockstream and users of its open-source software.
Blockstream suggested Liquid is set to launch in Q1 of 2016.
First announced in April 2014, sidechains were hailed as a radical concept for boosting the functionality of bitcoin by allowing assets to move from the main bitcoin blockchain to an alternative blockchain and back through a system of two-way pegging.
Once on an alternative blockchain, the assets can effectively be governed by a different set of rules, while still maintaining their ability to be transferred back to the bitcoin blockchain at a later date, and thus redeemed via the existing bitcoin market infrastructure.
Blockstream has to date raised $21m from investors including AME Cloud Ventures, Blockchain Capital, Future\Perfect Ventures and LinkedIn founder Reid Hoffman. Further, its team consists of some of the more noted developers in the space including Adam Back, Gregory Maxwell, Matt Corallo and Pieter Wuille.
Liquid in practice
On a technical level, Liquid will find partner exchanges transferring funds to a shared multi-signature wallet address, with a Byzantine round robin consensus protocol used to process transactions.
To ensure that no parties are able to block transactions, Hill explained that rules have been put in place to shield data about the transactions from network participants.
"As long as the transaction is constructed and the private key is correct and the unspent transaction output is valid, then all of the signers who are running nodes approve the transaction," Hill said.
While all parties in the Liquid sidechain are known and identified, Hill sought to highlight the difference between sidechains and private blockchain approaches.
"Liquid does have many of the same properties, but these exchanges are running a parallel blockchain [to the main bitcoin blockchain]. We can implement all the business logic at a protocol layer, so other party has custodianship of these funds. Other attempts are centralized, we don't have that issue," he continued.
Hill said Liquid will integrate Confidential Transactions, meaning that exchanges can process the same transaction data without the risk that information – such as trading volumes – will be revealed in the process.
The privacy protocol was introduced in the release of Sidechains Elements, a set of initial tools for developers, earlier this year.
Technology aside, Hill spoke to the everyday business challenges he believes Liquid will help the bitcoin ecosystem address, emphasizing the benefits it could bring to exchanges and traders.
"I think it's showing a maturing of the ecosystem, licensed exchanges are expanding their pool of customers. They now have more demands on the functionality they offer," he said.
Hill went on to explain how previously difficult tasks, like fulfilling contractual obligations to execute orders for family offices or institutions at the best market prices, were impractical within the current exchange system. With Liquid, he said, exchanges could now take advantage of sourcing bitcoins on a competitor's order book, a process he said positions the ecosystem to move closer to traditional derivatives and stock markets.
In statements, other members of Liquid echoed these remarks.
Zane Tackett, director of product development at Bitfinex, noted that the ability to move funds between exchanges in seconds would make arbitrage opportunities more accessible to the trading community.
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