April 8, 2019

A Brief Introduction to Liquid

L2B Global is a proud member of the Liquid network. Learn how this bitcoin side-chain will revolutionize the market.

A Brief Introduction to Liquid

On October 10, 2018, Liquid, a fully functional bitcoin side-chain developed by Blockstream, went live.

The Liquid Network provides fast, secure, and confidential transactions to address the needs of exchanges, brokers, market makers, and financial institutions around the world.

We are happy to have been a member on the network from the very beginning. In this post we will briefly explain why we think Liquid is going to vamp up the bitcoin market in a major way.

Illiquid Reality

Online exchanges are professional trading platforms used by experienced traders who speculate on the price volatility of bitcoin as well as provide market-making services. Brokers use exchanges to source liquidity at spot rates with the intention of reselling their positions at a premium to clients. Other traders engage in arbitrage trading or hedge their positions on futures platforms. All these activities require traders to put up capital, be it fiat or bitcoin, as floats in multiple places. The more venues you use, the more capital is required to execute trades efficiently. But why is it so?

We all know about fiat transfer delays: wire transfers may take several business days to clear, banks do not operate on weekends, and, of course, there is also a human factor. But bitcoin is not the fastest horse either. Its security model makes transfers final and irreversible, but it comes with a trade-off: confirmation times. While a bitcoin block is mined every ten minutes on average (giving your transaction one confirmation), this timeframe is not guaranteed. Moreover, a lot of exchanges and trading desks require more than one confirmation to consider your bitcoin transfer complete. Thus, bitcoin transfers may take up to one or more hours to settle. If you are an arbitrageur, which necessitates executing trades simultaneously on more than one exchange, you cannot afford to wait for so long. Time is money! Would it not be nice to be able to transfer bitcoin from one exchange to another in a matter of a couple of minutes? Enter Liquid.

The Liquid Solution

Liquid is a private network run by a federation of market participants who form a self-regulating body. The network is designed as a side-chain that works in conjunction with the bitcoin blockchain but does not have the restrictions of the main chain. The main benefits are:

  • Fast transfers: transactions are fully completed in two minutes;
  • Confidentiality: transaction amounts are confidential, so no outside observer can take advantage of such information;
  • Asset issuance: besides bitcoin, participants may create tokens that represent other assets, such as fiat currencies, that will benefit from the network's speed and security.

To summarize, traders are now able to send bitcoin and fiat between exchanges or trading desks privately in two minutes. This allows unprecedented market efficiency among existing market participants. Additionally, it removes barriers to entry to smaller players who do not possess enough liquidity to disperse among multiple floats: they can take advantage of the network's architecture to move funds across liquidity sources at very high speeds, beating slow confirmation times in bitcoin as well as turtle-like SWIFT or SEPA fiat transfers. Based on this, professional traders are able to build trading strategies and models that were not possible before.

Our Needs

As a brokerage firm, we are excited about the opportunities that the Liquid network is bringing to the bitcoin market. The use-cases for L2B Global include, but are not limited to:

  • Fast and private bitcoin transfers to / from liquidity sources
  • Replacing SWIFT / SEPA for B2B fiat transfers
  • Near-instant OTC transactions
  • Arbitrage
  • Market-making

If you are an exchange or a trading desk, we hope to see you on Liquid in the near future!