“What is the Liquid sidechain?
It looks like a private blockchain,
but claims to have some degree of decentralization.”
“If it does work, what does it mean…
for the Bitcoin community and other
sidechain projects, public or private?”
First of all, Liquid is a product name.
It is the creation of a company called Blockstream,
which has a number of projects in the Bitcoin space;
they also hire and pay a few developers to work on…
the Bitcoin protocol and the Bitcoin Core client.
Blockstream announced [this sidechain] a
long time ago, probably two or three years ago.
They have hired some of the developers who
came up with the initial idea of a sidechain.
A sidechain is a separate blockchain with a two-way peg,
whereby you can move [value] from Bitcoin’s chain…
to this other blockchain, use it [there for
some purpose], and then move it back.
In the case of Liquid, it is the first sidechain
implementation by Blockstream and has been…
in beta stage or trial stage for more than a year now.
Liquid is intended to be a backend exchange-to-
exchange pipeline for bitcoin transfers, so that…
bitcoin can move very fluidly between
exchanges without needing on-chain transactions.
The idea being, you have exchanges around
the world who must withdraw and deposit…
bitcoin to addresses that belong to other exchanges.
Every time they do a withdrawal or deposit, they are
not only using up space on the Bitcoin blockchain,
but they also need to pay fees.
Liquid is essentially payment channels with
exchanges that allow them to move money…
between themselves directly, like a SWIFT network.
Liquid uses a federated signing model.
It is not a mined chain, but a signed chain.
It uses a proof-of-authority [consensus algorithm];
there are some privileged nodes within the system…
that vet and manage the consensus rules of the sidechain.
They secure that blockchain
by taking turns signing blocks.
There is a degree of [distribution] compared to a
centralized provider like SWIFT, but there is not…
the degree of decentralization you have in a completely
open blockchain with a proof-of-work algorithm.
On the Liquid sidechain, you are actually moving Liquid
BTC around, which is a one-to-one equivalent of bitcoin.
You are locking up one bitcoin on the Bitcoin blockchain,
and that becomes one Liquid BTC that can move…
on the Liquid sidechain, presumably at
faster speeds and lower transaction costs,
without burdening the Bitcoin blockchain.
At any point in time, you can move one Liquid BTC
back to one bitcoin, at a one-to-one exchange rate.
That is the basic idea. This is not for end-users and
consumers; although there has been discussion…
about opening it up to others, this is something
for exchanges to manage large flows of bitcoin…
between themselves, in a network that
is off-chain and a commercial product.
It has fees, but as far as I understand the fees are
for the providers of the security on this system.
“Does the Bitcoin Liquid sidechain compete
with XRP / Ripple [in terms of] use case?”
Does the Liquid sidechain created by Blockstream
compete with XRP / Ripple [in terms of] use case?
I don’t think so. Ripple has a different
model in its consensus layer, as well as…
how the currency is used within the network.
I think the people who are interested in XRP are
not interested in Bitcoin, even through a sidechain.
There is a spectrum of applications here, from
payment channels and atomic swaps with…
[decentralized] Lightning Network, to a [distributed
proof-of-authority] sidechain like Liquid, to XRP / Ripple.
There is some overlap in those applications,
but I don’t think the overlap is enough and…
I think they differentiate enough
that they don’t directly compete.
“Do sidechains inherit any of the security properties
of the main blockchain they are connected to,
or are they completely independent?”
“If not, how can we trust them?”
That is a great question, Frank.
It depends on the implementation of the sidechain.
A sidechain is simply another blockchain that
has a way to transfer value from another blockchain.
You have to block chains that are
operating in parallel, side-by-side.
In fact, you can’t really say one is a sidechain of
the other, any more than the other is a sidechain.
They are both “sidechains” to each other.
They are both blockchains with mechanisms for cross-
blockchain transfers, atomic swaps, and pegging…
which allow you to move value from one to the other.
But that doesn’t mean they are
not independent blockchains.
The question is, what are the consensus
rules by which the blockchain is secured?
A sidechain is a blockchain with consensus rules.
Maybe it runs with proof-of-work (mining),
proof-of-stake, or federated proof-of-authority signing.
Whatever the case may be, it will have the security
characteristics those consensus mechanisms bring.
If two proof-of-work blockchains with substantial
hashing power were made sidechains of each other,
they would have different characteristics than
if you connect a proof-of-work blockchain like Bitcoin,
with a lot of hashing power, to a sidechain that has
[less hashpower] or a different consensus mechanism.
“How can we trust them?”
You can trust them if you understand the
security model and think it is strong enough,
but they don’t really inherit
the security of the other chain.
There are some exceptions to that with
merged mining, where both chains mine together,
but those exceptions don’t change the rule.
“Why have sidechains been overshadowed by other
crypto projects like Ethereum for smart contracts…
and security tokens?”
Well, we haven’t really seen a successful and
popular implementation of sidechains [yet].
Sidechains were proposed four or five years ago,
but [the deployment of] the underlying requirements…
that make sidechains possible have only
recently entered into the various blockchains.
Only two have launched so far, that I know of:
Rootstock and Liquid (just this week).
Other than that, we haven’t seen broad use.
Both of those are still in beta stage.
That is why sidechains are not yet, or may never be,
as popular as separate blockchains bootstrapped…
with their own consensus layer,
and operating with their own security.
I hope that answers your question.