Blockstream, the bitcoin technology startup, has announced the first commercial application of its proposed sidechain technology. They have named it Liquid, and the system is designed to work for bitcoin exchanges, payment processors and traders by reducing the time it takes for bitcoin funds to be transferred.
The technology will reduce the time for funds to move from 60 minutes to just a few seconds, which for traders and exchanges makes a huge difference to how they operate. Set to launch in the first quarter of 2016, Liquid will be implemented initially by five major bitcoin operators.
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One of the significant issues for bitcoin traders, exchanges and payment processors is the time it takes for funds to transfer in a transaction. For traders it means that they lose out on trades due to waiting for currency to appear, for exchanges and payment processors it requires significant investment to cover for the period where funds are in transition.
All of this is changing due to the sidechain technology developed by startup Blockstream, who after releasing their white paper a year ago are now launching the technology to five major bitcoin businesses, Bitfinex, BTCC, Kraken, Unocoin and Xapo, who will pay a fee to Blockstream for operating the system.
Blockstream CEO Austin Hill suggests that the new technology will reduce fund transfers from 60 minutes to just a few seconds, using a system of two-way pegging to allow assets to move between the main bitcoin blockchain and the sidechain where assets can be governed by different rules allowing quicker processing, while still being available to move back to the bitcoin blockchain at any time.
The idea has been well received, with over $21 million raised from investors, and will be put into practice in the first quarter of 2016.
Hill went on to explain the advantages to this technology over the private blockchain approach, saying “Liquid does have many of the same properties, but these exchanges are running a parallel blockchain [to the main bitcoin blockchain]. We can implement all the business logic at a protocol layer, so other party has custodianship of these funds. Other attempts are centralized, we don't have that issue”.
He added that he thought the technology will bring real advantages to traders and exchanges as well as payment processors, and that the introduction of this technology showed that the ecosystem as a whole was maturing, with customers expecting more functionality as time moves on.
One situation he highlighted was the need to fulfill contractual obligations to execute orders at best market price, which proved virtually impossible to adhere to with the current system. But with Liquid, moving funds in seconds allows arbitrage and other scenarios such as improved price from another exchange to quickly allocate assets at the current best price possible.