Liquid Network is Bitcoin’s leading sidechain: what it is, how it works, and which wallets are compatible.
Launched by Blockstream in 2018, Liquid Network is a Bitcoin sidechain, meaning it’s a separate blockchain with its own set of rules that can interact with the Bitcoin protocol.
The primary goal of Liquid was to enable fast and low-cost bitcoin transfers between exchanges. On Liquid, blocks are created every minute, and transaction fees are typically just a few cents.
While Liquid offers advantages in terms of transaction speed and privacy, it sacrifices some of the decentralization found in the Bitcoin network. Liquid is a federated network, managed by over 70 entities, including exchanges, wallets, Lightning Network companies, and other participants. Each entity operates a Liquid node. Even if Blockstream were to cease operations, the Liquid Network would continue to function independently.
Out of the approximately 70 members, 15 act as functionaries to confirm new blocks, secure, and manage the bitcoins held in an 11-of-15 multi-signature wallet.
Liquid also allows the issuance of assets beyond Bitcoin, including stablecoins like L-USDT, regulated security tokens, and bonds. Liquid addresses differ from Bitcoin addresses, with SegWit addresses on Liquid starting with “lq1q.”
Unlike Bitcoin’s transparent blockchain, Liquid supports confidential transactions that conceal the amount and asset being sent or received.
To access and use the Liquid sidechain, users must perform a peg-in operation, sending a certain amount of on-chain bitcoin to an address managed by the federation. The federation then issues an equivalent amount of L-BTC in exchange for BTC. Once the peg-in is complete, users can send and receive L-BTC, Liquid’s native asset. Each L-BTC is always backed 1:1 with on-chain bitcoin.
Besides peg-ins, users can also obtain L-BTC by purchasing them on exchanges or performing swaps, which involve exchanging on-chain bitcoin for L-BTC while paying a service fee.
To exit the sidechain, users perform the reverse operation, called a peg-out. In this process, L-BTC is sent to a burn address, where the funds are permanently removed from the Liquid Network. Once the transaction is confirmed, the federation releases an equivalent amount of BTC on the Bitcoin network and returns it to the user. Alternatively, users can use swap services or exchanges to convert L-BTC back to on-chain BTC.
Wallets compatible with the Liquid Network include:
Exchanges and swap services that integrate Liquid include:
