The bitcoin network is growing each day and the rate of blocks being generated is also growing proportionally. This has resulted in an increased lag in bitcoin transactions, which it is carried out over the blockchain in a conventional way. While normal one off bitcoin transaction between two wallets as part of a regular transfer is not affected by this lag, bitcoin exchanges and trading platforms are affected at times when they move bitcoins between wallets to improve interchange liquidity.
Sidechains are offshoots of a blockchain which frequently talks to the parent. But by themselves, they act a blockchain for a closed group of users or companies. By doing so, transactions happening over a sidechain doesn’t always have to go through confirmations through miners. The sidechains can be used to reduce the Interchange Settlement Lag while transferring between a large set of users/wallets. The potential use of sidechains was first published by Blockstream in a white paper about 6 months ago. While the paper explained the concept of sidechains, the company has gone ahead creating an actual side chain.
Blockstream’s soon to be launched Liquid is one such bitcoin sidechain created by the company. Following its own study, the company has created the first commercial sidechain that will be used by 5 well known bitcoin services as a pilot run. The five bitcoin based companies that will be using Liquid includes Bitfinex, BTCC. Kraken, Unocoin and Xapo. By using Liquid, these players can effectively circumvent bitcoin blockchain while executing certain transactions within the sidechain. By avoiding blockchain, bitcoin transactions can be executed instantaneously, eliminating the Interchange Settlement Lag among other things.
Liquid will come equipped with privacy and security protocols that will ensure safety and integrity of transactions over the sidechain. Transactions between Liquid and blockchain are executed using a separate security consensus protocol. Being a commercial service utilized by bitcoin products and services companies, it can be compared to an enterprise level solution and Blockstream will be charging a certain fee from those utilizing Liquid’s infrastructure.