Blockstream has announced Liquid, its first commercial sidechain application, which moves Bitcoin rapidly between exchanges without the existing host of liquidity inefficiencies, capital reserve requirements and counterparty risks.
Blockstream, which includes crypto luminaries such as Adam Back, Gregory Maxwell and Pieter Wuille, said its initial launch partners include Bitfinex, BTCC, Kraken, Unocoin, and Xapo. Discussions are underway with another dozen major institutional traders and licensed exchanges, added Blockstream in a statement.
Blockstream uses a "two-way peg" system to attach interoperable sidechains to the blockchain and introduces secure layers of innovation into the Bitcoin network.
Liquid provides a security profile inherently superior to existing methods of rapid transfer and settlement, said Blockstream. It is directly applicable for use cases being explored by existing financial institutions.
It also does away with what Blockstream describes as Interchange Settlement Lag (ISL) – liquidity inefficiencies including latency and confirmation times that hinder the overall prospects of the Bitcoin ecosystem.
This affects exchanges, payment processors, traders and remitters, who have to maintain multiple balances and accounts across the market to avoid ISL, increasing overall capital requirements and exposure to the possibility of counterparty risk.
An inherent ingredient in sidechain technology is a Confidential Transactions feature, which keeps the amounts transferred visible only to participants in the transaction (and those they designate), while still guaranteeing that no more coins can be spent than are available in a cryptographic way.
This goes a step beyond the usual privacy offered by Bitcoin's blockchain, which relies purely on pseudonymous - but public - identities.
In a recent interview with IBTimes, Adam Back, the president of Blockstream, explained: "The Confidential Transactions feature we put into the sidechain release we did earlier this year works by not disclosing the value of the transaction to the network. It's only disclosed to the parties - the sender and the recipient, and potentially their auditor."
The system uses some advanced cryptography so that the miners and full nodes that validate the network are able to check that the inputs add up to the outputs, so it balances.
"They can see that encrypted 3 + encrypted 5 = encrypted 8, but they don't know what any of the values are," said Back.
Blockstream is currently focused on integration, testing, and deployment of this service with a launch date of early next year, with additional documentation including a white paper to be published soon.
Blockstream said in a statement: "As a Bitcoin-centric company, we are excited to be delivering a real-world solution that moves thevecosystem forward.
"We hope that by maintaining the decentralised security profile requisite of a secure settlement and capital transfer system, we set the bar for how these systems should be built.
"We further hope that this inspires others to build on these and future improvements to the Bitcoin codebase and encourage others to take advantage of our work in both the original sidechain white paper and the implementation in Elements Project open source releases."
Companies partnering with Blockstream to implement Liquid sidechain technology also commented.
Zane Tackett, director of product development, Bitfinex, said: "By providing users a way to securely and instantly move funds across exchanges, Liquid allows participants to take advantage of arbitrage opportunities like never before, minimising spreads and increasing liquidity. Blockstream's innovative solution is definitely a game changer for the Bitcoin industry."
Samson Mow, chief operating officer, BTCC (formerly BTCChina), said: "BTCC is very excited to be working together with Blockstream to roll-out this innovative application of sidechain technology. Liquid is both a practical application of sidechains that allows us to provide nearly instantaneous global interexchange transfers for our users, as well as a major technical milestone that showcases the adaptability of Bitcoin."
Jesse Powell, CEO, Kraken, added: "Bitcoin introduced global, secure, reliable settlement within hours—about a hundred times faster than legacy financial networks that settle in days. Kraken looks forward to global settlement in minutes with Blockstream and the rest of the Liquid sidechain."
Federico Murrone, chief operating officer, Xapo, added: "We are enthusiastic about supporting Blockstream, which has one of the strongest development teams in the fintech industry, and their bitcoin-based approach to financial innovation.
"Xapo works with some of the largest exchanges in the Bitcoin space and we believe that, by implementing Liquid, we can help solve several of their main pain points."
And Sunny Ray, president & co-founder, Unocoin also added: "Among other things, Blockstream is solving a critical liquidity issue which is paramount to tackling global remittance markets. Bitcoin is well suited to meet the needs of Asia, the largest inbound remittance market in the world.
"By leveraging Liquid, we accelerate our business path towards faster & more efficient international money transfers."