Since its 2018 debut, Blockstream has promoted Liquid as a promising solution to Bitcoin’s scaling problems. Unlike the Lightning Network which proliferates with no federation, Liquid is a federated sidechain managed by 15 functionaries.
In other words, it’s a managed fork of Bitcoin meant to reduce latency and fees.
Co-founder of The Bitcoin Company, BenTheCarman, is similarly unimpressed. “It is a fork of bitcoin with a few fancy things added (tokens, confidential transactions, covenants) and bundled together with a 1 minute block time, federated custody, and some Blockstream branding.”
Where did all the money go?
In 2021, Blockstream raised $266 million Canadian dollars ($210 million) at a $4 billion valuation, in part to monetize the Liquid Network. Baillie Gifford led the Series B round, which also attracted investment from iFinex, the parent company of Tether.
In addition to heading the development of Liquid itself, Blockstream develops financial products that trade on the Liquid network, including bitcoin-pegged L-BTC tokens, dollar-pegged USDT tokens, merchandise vouchers, and even securities.
Former CSO Samson Mow cited 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 attracted attention from players like Bitfinex, BitMEX, and Bitso. Blockstream bragged about 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 of Bitcoin, Liquid inherited most of the issues that make it difficult for Bitcoin to scale at the blockchain level in the first place. Nevertheless, it actually benefits from lower usage, insulated from the actual Bitcoin network’s congestion 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.
In order to gain liquidity, users, and credibility, Liquid must convince Bitcoiners to custody their real bitcoin into the 11-of-15 multisig controlled by Liquid functionaries. To that end, it offers attractive features for users to peg-out real BTC and get into its Liquid network.
For example, it offers one-minute block time instead of Bitcoin’s ten minutes. It also introduced federated custody with a multisig wallet and an accountless, two-way peg using its proprietary, pegged asset.
L-BTC as a form of ad-hoc custody works on the same principle as swapping ETH tokens for a “wrapped” or “staked” stand-in token on another blockchain.
Of course, L-BTC depends on Blockstream and its 14 other functionaries being trustworthy enough to not disappear with the original BTC or fall victim to a massive exploit.
For its part, Blockstream says the bitcoin is being held in a multi-signature wallet that requires 11 of the 15 functionaries to sign off on a transaction. It also notes that functionaries have never stolen any Liquid users’ BTC since inception.
Despite red flags, Blockstream still promotes Liquid
Naturally, Liquid has its supporters. Blockstream has spent untold millions on its development and continues to issue press releases about new features regularly.
Blockstream investor Brad Mills claimed that Liquid can be part of the solution for scaling Bitcoin. BenTheCarman pointed to flaws in Liquid’s competitor. For example, the Lightning Network recently disclosed a cycling attack vulnerability.
Blockstream seems anything but discouraged, of course. With billions raised to fund projects like Liquid, the firm has ample support. However, Liquid’s lack of any serious adoption, concerning centralization, and a reliance on L-BTC to never de-peg suggests that the resources Blockstream spends on the project will ultimately be wasted.
Update December 19, 16:45 UTC: A previous version of this article mistakenly referred to BenTheCarman as Ben Price.