Since its debut in 2018, Blockstream has promoted Liquid as a promising solution to Bitcoin’s scaling problems. Unlike the Lightning Network, which spreads without a federation, Liquid is a federated sidechain managed by 15 officials.
In other words, it is a managed fork of Bitcoin, intended to reduce latency and costs.
Liquid’s reception has been muted at best. According to critic Udi Wertheimer, “nobody uses it.” He even notes that the meme crypto Dentacoin is often more widely used than Liquid.
Bitcoin developer Ben Price is also unimpressed. “It’s a fork of bitcoin with a few nice things added (tokens, confidential transactions, covenants) and bundled with a 1 minute block time, federated custody and some Blockstream branding.”
On a normal day, there are more tweets about Liquid than there are transactions taking place on the network.
good news
the liquid sidechain continues to march forward, with no shutdowns, exploits, or liquidations in sight
or any transaction
— Udi Wertheimer (@udiWertheimer) June 13, 2022
Read more: What are sidechains and can they really make altcoins obsolete?
Where has all the money gone?
In 2021, Blockstream raised $266 million Canadian dollars ($210 million) at a $4 billion valuation, partly to monetize the Liquid Network. Baillie Gifford led the Series B round, which also attracted investment from iFinex, Tether’s parent company.
In addition to leading the development of Liquid itself, Blockstream develops financial products that are traded on the Liquid network, among others bitcoin-linked L-BTC tokensdollar-pegged USDT tokens, merchandise vouchers and even securities.
Former CSO Samson Mow mentioned the Blockstream Mining Note as an example of a product that could be tokenized using the Liquid Network. The Blockstream Mining Note represented shares of Blockstream’s mining operations.
Liquid caught the attention of players like Bitfinex, BitMEX and Bitso. Blockstream bragged about it attracting $1.1 billion in network value when it closed its Series B round. However, it became clear that Liquid has its own scalability issues.
As a fork from Bitcoin, Liquid has inherited most of the problems that make it difficult for Bitcoin to scale at the blockchain level. Nevertheless, it actually benefits from lower usage, isolated from the congestion of the actual Bitcoin network and high transaction fees.
L-BTC: Another pegged trust-based token
The entire Liquid network depends on one simple promise: 1 L-BTC will always be worth 1 BTC.
To gain liquidity, users, and credibility, Liquid must convince Bitcoiners to store their real bitcoin in the 11-of-15 multisig managed by Liquid officials. To this end, it offers attractive features that allow users to link real BTC and access the Liquid network.
It for example offers a block time of one minute instead of Bitcoin’s ten minutes. It also introduced federated custody with a multisig wallet and an accountless, two-way link using its own linked assets.
L-BTC as a form of ad hoc custody works on the same principle as exchanging ETH tokens for a “wrapped” or “staked” stand-in token on another blockchain.
Explained: How Drivechain caught the attention of the Bitcoin community
Read more: Replacement Bike Attacks Risk Millions in Bitcoin Lightning Network
Naturally, L-BTC relies on Blockstream and its 14 other officials to be trustworthy enough not to disappear with the original BTC or fall victim to a massive exploit.
For its part, Blockstream says the bitcoin is held in a multi-signature wallet, which requires 11 out of 15 officials to sign off on a transaction. It also notes that officials have never stolen Liquid users’ BTC since its inception.
Despite red flags, Blockstream is still promoting Liquid
Of course, Liquid has its supporters. Blockstream has spent countless millions developing it and continues to regularly release press releases about new features.
Blockstream investor Brad Mills claimed that Liquid could be part of the solution for scaling Bitcoin. Ben Price, CEO of gift card seller The Bitcoin Company, pointed out shortcomings at Liquid’s competitor. For example, the Lightning Network recently disclosed a vulnerability to bicycle attacks.
Of course, Blockstream seems anything but discouraged. With billions raised to fund projects like Liquid, the company has ample support. However, Liquid’s lack of any serious adoption, with regards to centralization, and a reliance on L-BTC to never disconnect suggests that the resources Blockstream spends on the project will ultimately be wasted.