On a recent occasion, we were able to have an interview with the world famous Blockchain developing company Blockstream. We did the interview with Allen Piscitello and he talks about his thoughts about sidechains, the Liquid Network, Decentralization and much more. Please have a look.
Allen Piscitello (Vice President of Product Management at Blockstream )
Interview Date :17th January 2020
Allen Piscitello : Getting into Bitcoin and Blockstream
I got into Bitcoin back in 2011. I read about it from a poker website. I was poker player back then, and one of the big problems we had especially in the US was sending money to these sites to play. They shut down a lot of the banking for this, and someone mentioned this thing about Bitcoin digital currency. I couldn’t believe these coins were selling for 0.75 cent, and thought that it was ridiculous. So I started researching and reading a lot about it. Then the famous Mt. Gox incident in Japan happened.
At that time, that was like the only place to trade, however there was this big run-up and the whole market crashed. I thought this whole thing is crazy which was held up by this one guy in Japan. So I got out and sold everything. Later, I get back in because I was really interested in prediction market.
However, once again I got scared of the forking that was about to happen and sold everything again. Nevertheless, in the meantime I was still very involved. I just had my doubt about some of the centralization of mining. I stayed in touch, I wrote a lot about Bitcoin, and also had the chance to meet many of the people from Blockstream and eventually was hired by Blockstream as Product Manager.
Structure of Sidechains
The way I like to explain sidechains is “a way to move one digital currency from one network to another network and back”. This is so you can have different properties and features that you wouldn’t have on the main blockchain. So Blockstream was founded upon this idea of sidechains 5 ~ 6 years ago now. There is a lot of interesting things that can be built on Bitcoin, however Bitcoin moves at a slow and steady pace. More experimental features could be tested off on a another branch which only the people who choose to go to that branch would be subjected to. Thus, if there are any problems, this will not risk the main chain. There are a couple these today, such as the Liquid Network, which is focused heavily towards trading applications and assets, Rootstock is another one which is focused on features that Ethereum has but with Bitcoin as the native coin. So sidechains have different rules and features that you have which you cannot get on the main chain.
One feature that Liquid has is a “ Federated Block System”. This means that there is a group of people who are creating blocks and are validating them. With mining in Bitcoin, it is great way to secure the network, however it is very unreliable as it is very lock-based. There is a distribution when a block will be found, it could be found in 10 seconds or it might take 3 hours. For trading applications, this is really bad. If I am trying to move my money from one exchange to another, and I don’t know if it is going to take 1 minute or 3 hours, that is really bad. Liquid gives reliability of getting blocks verified every minute. But you get a trade off, so whereas you have with mining, everything is decentralized based on miners, you have a federated group. So, a trade off maybe is not a big deal if your doing something like a trading application or if you are already holding your money out of an exchange.
Main chain transactions and Sidechain transaction
The transactions themselves on Liquid are somewhat similar to bitcoin, but there is a couple of differences. The two main differences allow for asset transactions. The common use case here is something like a stable coin or a security token. Besides just sending Bitcoin, you can send any of other assets and don’t have to create a smart contract either.
Another thing that we have at Liquid is Confidential transactions. This is a way to obscure the amount and the asset type of the transaction from the general public. So if you are just looking at a block explorer on the Bitcoin network, not only you can see if I was sending you some Bitcoin, but you would be able to see how much change I am paying myself (we also have a block explorer called Blockstream.Info). In such cases, if I have quite some Bitcoin, that might reveal a lot of information about me. That’s something potentially very dangerous if that information gets out. Also, If I would move my money to an exchange, everyone can see that that money is being moved to that exchange before I can have the chance to trade, so I am going to be front-runned in that case.
In the other hand, Liquid hides all that information except from the people who need to know the sender and the receiver, and any third party that the sender and the receiver decide to share the information with. Hence, the anonymity is higher on sidechain and you’re shielding all that private information. However, in the meantime everyone can still validate that I am not creating money out of thin air. They will know that what I am sending you is real but not revealing the amount.
Draw the line of Privacy
I think we try to balance with Blockstream. We want things to be verifiable, but we also want it to be confidential. We view privacy as something where you are not hiding everything but you choose who to share that information with. There are people you need to share that information with. Maybe there is a regulator or an auditor that you need to share that information with, and you can do that. But you don’t want to share this with you competitor and someone who is harmful to you, so you definitely want to keep this hidden. So this is something that is actually really important to some of the institutional trainers and financial institutions. They have to protect these informations for their users. So I think this is a very important part of our system.
Liquidity and Volatility
Liquidity can be defined as “the larger the purchase of something does not move the price” in the market. So if there is not many traders with funds available in your exchange, and someone wants to buy just a small amount, the price will rise very quickly. That is not very good for a buyer of an asset. Buyers are not going to come and buy Bitcoin at such an exchange. For example, if they buy Bitcoin worth of 1000$ and the price spikes up, they are gonna get a very bad deal. So It is really good for an exchange to be able to sell large quantities of an asset without moving the price heavily.
Volatility is “the movement of price over time”. So if something is very volatile, the price will go up and down quite a bit. Because there are so many different Bitcoin exchanges in the market as we are expanding in global technology. There are several fragmentation in the market, and a lot of small markets that need to be consolidated in some way. So if we assume that the price goes up in Japan, it might be lower in the USA. The more these exchanges can interact with each other quicker, the less the prices will fluctuate over time. Moreover, any of these big buys that happen will spread out across a lot of different venues and exchanges, making sure don’t experience much wild movements in the price.
One of the things that exchanges can benefit from with Liquid is being able to increase their liquidity and volumes by receiving funds faster. By using traditional assets like Bitcoin, as well as tokenizing other crypto assets or by tokenizing fiat assets, so the more exchanges that are involved and integrated in Liquid, the greater liquidity they get.
Let’s say you have a big buyer that comes and buys all the bitcoin on your network. You’re going to need to have someone else who can provide that liquidity for your other customers to come and bring back the supply. With Bitcoin, you have a network that could take 10 minutes or much longer, whereas with Liquid you can get that done almost instantly. That’s what a lot of exchanges see the benefit of. They can basically get their customer’s funds faster, and they don’t have to wait for confirmations. That is a very nice feature to have for your exchange and your customers.
Achievements at Blockstream
It’s been 6 years since we started, and Blockstream is busy working on a lot of projects. Liquid is obviously a big project and we started working on it very soon after the founding of Blockstream. Talking about other big projects that we might be known for is the Lightning network. This was also something we were heavily investing in. There are several different implementations of the Lightning network today and we work by different companies. We are heavily invested in Lightning as a scaling technology for Bitcoin.
Nevertheless, Lightning is also compatible with Liquid, and you can do lightning transactions on top of Liquid with Liquid Bitcoin. In the future, after there have been some enhancements to lightning, we would like to be able to do asset transactions with Lightning as well. We are also working on something called Blockstream Green. It is a non-custodial multi-signature wallet. This means that Blockstream has one of the keys to your wallet and you have the other key which allows for a two-factor authentication. This means that, even if Blockstream would not be anymore tomorrow, you would still be able to recover your funds even without us.
Compatibility of Decentralization and Centralization
I think they are more compatible that people think. An important thing to remember is that you can build a centralized system on a decentralized system. For example, you can have a Bitcoin bank that is centralized on Bitcoin that in itself is decentralized. The good thing is that the bank can prove they have the funds, and there are many benefits from it. However if you try to build a decentralized system on a centralized system, that will be next to impossible.
Looking at Liquid, it is semi-decentralized and has 15 parties and numerous jurisdictions around the world. People can comply with regulations for their part of it. This is what we are seeing with security tokens. There are a lot of restrictions about “who can have these assets?” and “how they are transferred” where you can build that on top of a fairly decentralized system, and it works. If you don’t want that, you don’t have to touch that asset. You can just stick with Bitcoin. It’s OK. So I think it’s all about choice; give the choice to the user, give the choice to the issuer etc. Sometimes people don’t have the choice of complying with these regulations, but we want the scalability to do that.
Necessity of Mining
Mining is a very important part of Bitcoin. The idea of mining is that it is extremely costly to change the history of the ledgers. Due to that all miners and Bitcoin are anonymous, you don’t have to register with the network. All you have to do is to run something that is capable of doing computations. There are many fractures that solves these equipment in many mining farms across the world.
There is no way any miner can rewrite history even if they spent enough money or had enough computation power. Exchanges have fixed this from happening by having rewards for the miners to do computation mining. As long as there is enough people mining, and they are not colluding together, this won’t happen. So that’s good for Bitcoin, but it’s also extremely expensive and unpredictable as it is a random process of getting a block. You don’t know how long it will take. So that’s very good for a decentralized system. Mining is very costly but its as far as we know, it is the best way to do this.
Now for Liquid, we replace mining with something we called block- signing. Each of the federation members that are running what we call functionaries that is a server that has a HSM, which is a hardware security module inside of the server, on it that protects private keys. They all need to sign a block for it to be valid, and providing a signature is extremely cheap, especially compared to mining. Any of these functionaries can produce this signature very easily. Because it is easy to do so, we have a HSM following certain rules such as not rewriting history on a block.
This allows them to happen at a very reliable rate. They have time to go off every minute and take turns; One proposes a block, the other members will look at the block see if its valid, and if they find it to be valid, then they will sign the block with a digital signature. As long as 11 of the members have produced a digital signature, a block will be formed. This is why you can make a block every minute. It is a different kind of trade off and these members are known parties. They have an incentive to keep the network running, healthy and functional rather than going back and rewrite history. All the users of Liquid can also run a full node as well even if you’re not a member. If I just opened up the software, I could make sure they are obeying by those rules.
Mining effect on the Environment
Mining does use a lot of energy to keep ledgers going so I can understand the concern. What we have noticed is that a lot of this electricity comes from areas that are not able to actually utilize that electricity anyway. In some areas of China where there is a lot of hydro-power, but it’s in isolated areas and can’t be used anyways. I have a different perspective of it. I think mining will actually generate a lot of demand of electricity in very efficient ways with green technologies. It can also subsidize a lot of these things that otherwise wouldn’t be built. By doing that, you will see more efficient use of energy and basically being able to provide demand for a steady state of electricity.
The state of demand for electricity is fluctuating a lot. For example, in many places around the world there is a need for air conditioners during the day, but during the night the demand will diminish. In comparison, if you have a steady state demand for electricity you can actually offset the costs of electricity. I think you will start to see a lot of innovation into clean technology like hydro-powers and nuclear powers. Even if it was not economically feasible in the past, it will be feasible from now on with new innovations. So there is no shortage of energy. There is something called Jevons paradox; If we start getting more energy in the world in more efficient and responsible ways, it might benefit and help a lot of people.
Lightning Network is a technology layer for Bitcoin and Liquid. It allows people to do a settlement process (transaction) nearly instantly and that for nearly 0 fees. In other words, if I opened a Lightning channel to you, we would both put in money. If I want to pay you, we would just have to keep track of how much we owe each other, and keep the ledger updated. We don’t even need to share that with other third parties. If you decide to go away from the lightning network, you can do so and close your side of the channel. Although, the network has a policy that goes in effect if you try to close your side with an earlier ledger of a time when you had more money. Then I can prove that you trying to do fraudulent transactions and can get you punished for it.
That is the simple version of Lightning. Now, in the real world, it’s routing these payments not from me through you, then through someone else you know, and continuing on doing this world-wide scaling in order to be able to routing funds, but rather in a fairly private way. Let’s say I’m paying someone 5 destinations away from you. I just need to tell you who to pay next , and they will have to pay the next person while it is still secure. They can only update this ledger if they actually payed the next person like they were required to.
Thus, I believe Liquid and Lightning are complementary, and I think Lightning is going to be used for low value account, whereas Liquid is very useful for big chunky payments that need to happen very quickly for the exchanges.
We absolutely would love to do an integration of Lightning and Liquid in the future. So we already have support for Liquid for L-BTC, that is Liquid-Bitcoin which is currently available. We wanted to support assets, but there are some technical hurdles in the way. They would require some changes in the lightning network but we know how to solve it, so it’s just a matter of time till we get there.
Let’s suppose you have the idea of creating another digital asset by using Tether as it is a good example of a stable coin. The way it work is that a certain individual deposits money in their bank accounts where Tether is applicable. Tether will give you a Token that is worth the deposited amount, which in return you can use it through the network. Right now, blockchains just in general aren’t good at scaling for huge volumes of transactions. But with a Lightning network, you are taking those payments out of the chain as not all people need to know about final settlements. If you do that with an asset, this would be useful for a retail-type of payment application of a stable coin where it can be used in high frequency. If I would pay a tokenized dollar instead of Bitcoin, I would be able to do it now on the Liquid network.
Blockstream’s Devoted to Technology Improvement
We do a lot of research on Bitcoin. Our research team is devoted to technology improvement. Dr. Pieter Wuille is one of the developers that has been in the space the longest. He has worked at a lot of big features like SegWit, Taproot, MiniScript, and also a technology called Simplicity. Simplicity is a smart-contracting language design to be verifiable. This is very different from something like Ethereum’s Solidity which is designed to write smart contracts very easily. However, Simplicity is designed to be very rigid and easy to prove what’s happening.
Our long-term vision
I think Liquid is the proving-ground for our technology where everything is coming together. Cryptocurrency is the first natural fit for this application because people are already doing it this way. We are starting to see some of the traditional financial systems starting to slide more into the space. We are seeing companies like Fidelity getting into Bitcoin, and other financial firms looking at Bitcoin as a digital securities. I think we are going to see those two world converge.
As this grows, we are going to see either Liquid or a federation, that is very similar to Liquid, starting to be used in global financial settlement systems. There is a lot of problems in this as of yet; people who have more shares of a stock, they think they own it just because the whole system is a mess. You can solve a lot of these problems with the technology Liquid is based on. Our goal is to make Liquid successful, prove to the world that you can start settling these assets, and be able to verify a crack in the system but still maintain that confidentiality. I think that it will spread even more to other financial systems as well, and that is the vision of our company.
Interviewer , Editor : Lina Kamada
The Article published on this our Homepage are only for the purpose of providing information. This is not intended as a solicitation for cryptocurrency trading. Also, this article is the author’s personal opinions, and this does not represent opinion for the Company BTCBOX co.,Ltd.