Liquid is a commercial sidechain that combines Confidential Transactions and several other Elements to provide high-speed transactions between Bitcoin Exchanges.
Instead of proof of work (like in Bitcoin), Liquid depends on a distributed group of “signatories”, or functionaries, to create blocks. These functionaries are hardened black boxes that enforce the rules of the network as long as they are connected to the Internet. We have distributed these functionary boxes across the world to a number of participants, known as “the functionary grid”.
When it is time to append a new block to the Liquid sidechain, the block is signed by the first functionary in the grid, then handed to the next. Each time the block is passed to the next functionary, it is checked by the code running inside the black box to make sure it follows the rules, then is signed and passed on to the next until a supermajority of nodes have signed the block.
Today, key players in the Bitcoin market, including exchanges, payment processors, traders, and remitters, experience delays when moving bitcoin between accounts in different locations. We refer to this as Interchange Settlement Lag (ISL) – a host of liquidity inefficiencies including latency and confirmation times that hinder the overall prospects of the Bitcoin ecosystem. Dealing with these issues requires market participants to maintain multiple balances and accounts across the market to avoid ISL, increasing overall capital requirements and exposure to the possibility of counterparty risk.
Liquid is a powerful sidechain with wide-reaching implications. To learn more, read the Liquid announcement.