Blockstream, a Montreal startup made up of some of the best-known Bitcoin architects, cryptographers, cypherpunks, and entrepreneurs, has released its first product aimed at reducing some of the currency’s inherent limitations.
The startup, lead by chief instigator Austin Hill, also calls its founding members Adam Back, Gregory Maxwell and Pieter Wuille. Blockstream now has over 50 contributors adding to the project and raised $21 million in venture capital last year.
This week’s release from the startup could be seen as ground-breaking within the Bitcoin space, as it has created a solution to a problem that hasn’t thus been solved.
Liquid will improve capital efficiency and market liquidity by facilitating rapid and secure transfers between accounts held at any participating exchange or brokerage. Blockstream brought along some heavy-hitters in Bitcoin as its initial launch partners, in Bitfinex, BTCC, Kraken, Unocoin, and Xapo. Discussions are “underway with another dozen major institutional traders and licensed exchanges”
Blockstream explained in a release to its investors that key players in the Bitcoin market, including exchanges, payment processors, traders, and remitters, experience delays when moving bitcoin between accounts in different locations. It’s referred to this as Interchange Settlement Lag (ISL) – a host of liquidity inefficiencies including latency and confirmation times that hinder the overall prospects of the Bitcoin ecosystem. Dealing with these issues requires market participants to maintain multiple balances and accounts across the market to avoid ISL, increasing overall capital requirements and exposure to the possibility of counterparty risk.
“As a Bitcoin-centric company, we are excited to be delivering a real-world solution that moves the ecosystem forward,” said Hill. “We hope that by maintaining the decentralized security profile requisite of a secure settlement and capital transfer system, we set the bar for how these systems should be built.”
Liquid will be available in 2016, and will serve as the first commercial application for sidechains. A few months ago the startup released the source code of Sidechain Elements – a codebase for developers to experiment and build sidechains.
Blockstream is aiming to circumvent the areas where the Bitcoin blockchain is found lacking, while retaining decentralization.
“For instance, transactions processed on Liquid are not processed by the mining community,” wrote Cryptocoinnews’ Samburaj Das. “Exchanges and companies using Liquid will, in effect, have the means to transfer funds and assets between the blockchain and an alternative sidechain via a ‘two-way peg’ using a consensus security protocol to authorize transactions.”
The Wall Street Journal’s Paul Vigna wrote that the move represent’s Blockstreams’ aim to create a borderless, decentralized, “trustless” open platform that allows people to exchange value on a peer-to-peer basis, without any banks or governments getting in the middle. However, “it’s an idea that is starting to be lost in the scramble on Wall Street to adopt the technology and bend it to the banks’ own needs.”
Vigna wrote that Liquid represents one more line of defence in actually keeping the cryptocurrency alive. Bitcoin still represents the only case of this type of software to actually reach mass markets, and its price has stabilized, but the actual technology has been the topic of debate over the past year.
“From the startup world to the biggest Wall Street firms, there are numerous efforts under way to build products and services that utilize bitcoin’s underlying technology, while abandoning Bitcoin itself. The Blockstream group is an effort to counter that tide,” he wrote.
When bitcoin was first developed by the pseudonymous Satoshi Nakamoto, certain limitations were built in, with the goal of maintaining a stable release of coins over time as an incentive to the decentralized mining community to keep the system running. Any changes to the system must be approved by the mining community. As the system has grown, these limitations have grown more constricting. The debate over raising the cap on block sizes earlier this year, for instance, sparked a major rift in the community.
These limits have made it harder to build products for other uses on top of bitcoin, and many decided it was simply easier to build entirely new systems. Ethereum and Ripple are building separate platforms based off bitcoin’s core technology. Firms like Symbiont and Overstock have built platforms aimed specifically at the traditional financial system’s settlement and clearing business. Still others, like ItBit, R3 CEV’s consortium, and Digital Asset Holdings, are also developing products aimed at Wall Street.
Liquid is Blockstream’s response to these competitors. It’s not unlike Ethereum, or Ripple for that matter; all of them take the underlying technology, but scuttle all the elements that place the currency as the central product. In this alternate system, the currency is reduced to a token used solely to represent transactions.
-Wall Street Journal
As for Hill and his cofounders at Blockstream, more documentation (including a white paper) will be published soon, and the startup expects to be able to provide further updates on additional participants joining the sidechain.