Image Source
How does Liquid Network work?
The difficulty is to orchestrate all the chains between them, by managing the entries and exits to and from the main blockchain. Usually, validation consensus is done either by proof of work or by proof of stake. With Liquid, unlike Bitcoin (BTC), the validation of the blocks will not be the responsibility of the miners, since this would introduce latency issues. This is called a federated model. In this model, the number of validators is fixed and no longer dynamic as it is currently.
In the white paper , it is written that reducing the number of participants increases the speed and scalability of the system. The members of the federation form a "federated sidechain".
To popularize, let's say that a user sends 2 BTC. These BTCs will be frozen, and an equivalent amount will be created on the sidechain . The information will be transmitted via an "in" channel of a federated server. This is followed by processing according to the rules of the sidechain . Conversely, once processing is complete, the information returns to the main blockchain via an “out” channel . Consensus is achieved via a “federated sidechain” .
There are therefore 3 blockchains:
- The main one, that of the Bitcoin network;
- The lateral sidechain which will bring added value;
- The federated sidechain that will establish consensus around transactions.
The latter is called a “federated sidechain” because the network requires the trust of a set of members to guarantee the security of this blockchain, which is indexed to Bitcoin's blockchain (with a tokens / BTC ratio of 1: 1).
Having a limited number of people in the network may seem surprising since this model is very close to a centralized system. Especially since Bitcoin owes its robustness to the large number of peers. However, Blockstream maintains that the network remains secure because the trading platforms hosting the servers are geographically separate. In addition, updates over the network must first be accepted by all participants. Finally, no single entity can control more than one server. The network structure will allow for real-time audits.
Liquid: principle of operation
When Alice wants to send money to Bob, he contacts his favorite exchange platform. The local node of this exchange takes care of finding another suitable local node, willing to carry out transactions within the strong Federation, to transfer assets to Bob. They negotiate the terms, namely the exchange rate and the execution time, and inform Alice of the result. If she accepts, the assets are transferred to Bob.
Who hosts these federated servers?
These are the institutions that host the servers. There are currently 23 of them, among them we can name Altonomy , Atlantic Financial , Bitbank , Bitfinex , Bitmax , BitMEX , Bitso , BTCBOX , or BTSE , among others. These institutions will also serve as a network security federation.
How are the federations organized?
Within this federation, there are entities called officials. Their role is to execute operations under certain conditions, having the power to control the transfers of assets between blockchains, and to enforce the rules of consensus. For greater security, these officials are divided into two types.
On the one hand, blocksigners sign transaction blocks on the sidechain . On the other hand, the watchmen (custodians) are responsible for the transfer of assets and will sign the transactions dumped on the main chain; custodians are required only when transferring funds. Only blocksigners are needed to achieve consensus.
To move assets between blockchains, officials use a "federated anchor" mechanism . And in order to fight against corruption, the servers used are separated geographically and legally. The members of the federation each operate a secure server, which runs Bitcoin (BTC) and sidechain nodes , as well as software to create and manage cross- chain transactions. Each server contains a hardware security module that manages cryptographic keys and signs with them. The task of the module is mainly to protect the security of the network and, if a compromise is detected, to delete all its keys, which causes the network to freeze.
Proof of authorization of pegout
Still with the aim of combating malicious behavior and in order to respect the rules of confidentiality, the network controls the transfer of assets to the main blockchain via a system known as “pegout authorization proofs” . This mechanism allows by using the destination Bitcoin addresses to verify certain users of the side chain. This control falls to the guards. To do this, they have a whitelist of authorized private keys available. They refer to trusted group members who can prove control of their Bitcoin address, but do not associate their identities with it.
To alter the proper functioning of the federated anchor point system, we must at least compromise the majority of officials, whether they are blocksigners or watchmen . Even then, the tampering is still detectable and usually immediately observable as the blockchain is replicated and validated on machines other than those of the officials.
What is the interest of officials in ensuring the smooth running of the network?
In a proof-of-work consensus, miners have an interest in keeping the network running smoothly because they have more to gain by being honest than corrupt. Too much energy expenditure would be necessary in the opposite case. But what about the officials, why would they ensure the reliability of the network?
As the overall value of assets within a strong federation increases, the risk of an attack increases, and it becomes crucial that they cannot successfully target any official or the codebase manager. Fortunately, as participants in a strong federation increase the value of assets flowing through the system, they will naturally be prompted to take more care of access to federated signatories under their control. Thus, the federated security model aligns perfectly with the interests of its participants.
Conclusion
Liquid is a controversial project, since it opposes the very principle of decentralization inherent in cryptocurrencies; but it will most certainly help mass adoption of the latter. Indeed, institutions would not risk transferring digital assets at the risk of loss of value. However, the transparency of the code, which can be audited in real time, and the measures taken between strong federations can give confidence to this model. If Liquid is not the miracle solution, it goes without saying that it comes close to it.
Please feel free to subscribe to CryptoPlanet360 on Youtube to get the latest videos about Crypto projects and Blockchain
Subscribe here: https://bit.ly/2NSkrOU
Make Money Online - Earn Cryptocurrency for blogging on Publish0x:
Register here and start earning: https://bit.ly/38dBJ25
