Hardcore Bitcoiners are understandably skeptical of Blockstream’s Liquid side chain. But as the Bitcoin ecosystem grows, we will need more Bitcoin-backed services that the Bitcoin network itself cannot provide. Liquid is a semi-centralized side chain that, most importantly, doesn’t have any unnecessary shitcoin. This blog series will discuss some of the use cases that are now possible through the integration of Specter Hardware and Specter Desktop with Liquid that might be of most interest to Bitcoiners.
The possibility of having fully private on-chain Bitcoin hidden transactions has been discussed for years. But don’t expect it to happen anytime soon, if ever. The Bitcoin ecosystem is wary of experimentation on the Bitcoin base layer. We have to go slowly and be as careful as possible.
Indeed, as Alex Gladstein recounts in his recent article “The Quest For Digital Cash” for Bitcoin Magazine, cypherpunk Adam Back “realized early on that it would be extremely difficult to implement CT [Confidential Transactions on Bitcoin]because the community has naturally prioritized security and auditability over confidentiality. Adam Back and Greg Maxwell therefore teamed up to found Blockstream, largely to implement confidential transactions on a Bitcoin sidechain. This side chain is called Liquid and works since november 2018.
Confidential assets and transactions on Liquid keep the amount and type of transferred assets visible only to transaction participants. Yet, they still cryptographically guarantee that it is not possible to spend more coins than is actually available.
While CoinJoin will continue to be a powerful tool in Bitcoiner’s privacy-focused arsenal, it’s worth familiarizing yourself with Liquid’s confidential transaction privacy features. You “fix” bitcoin to Liquid and receive an equivalent amount of L-BTC on the Liquid side chain. In addition, an increasing number of exchanges will allow you to easily withdraw your bitcoin as L-BTC. You can then send your L-BTC confidentially to any recipient cash wallet. These transactions are inexpensive and very fast. The recipient can then either deposit the L-BTC into their own Liquid-supported exchange or “switch back” to normal on-chain bitcoin.
Try it in Specter with a small amount of testing. Find out what information can and cannot be traced when switching from Bitcoin to Liquid and through confidential transactions. You don’t get perfect privacy here, but definitely improved privacy.
One day, hopefully soon (hint, developers hint!), We’ll see a CoinJoin implementation based on Liquid’s confidential transactions. Any amount – any asset! – enter the mix and everything that comes out of it would have no deterministic traceable link. At this point, you might have near-perfect privacy at an even lower cost than current on-chain CoinJjoin implementations.
Privacy Best Practices: Coinjoin, Lightning, Liquid
Coinbase and other exchanges know how many bitcoins you’ve bought and which UTXO those bitcoins are in. This data is shared with chain surveillance companies that analyze on-chain transaction paths, selling their services to malicious actors. This data will sooner or later be leaked or hacked and will end up in a darknet market.
For reasons of financial confidentiality, any working capital transaction with bitcoin from a company or individual must first be joined to CoinJoin and then returned for payment transactions to Lightning and Liquid. For cold storage, bitcoin should be held in an on-chain wallet and not on Liquid’s federated side chain. Lightning channels are meant to facilitate payments, not store value. Lightning Hot Wallets have their private keys always online and still need enhanced hardware backbone security. Meanwhile, Liquid makes it possible to move high amounts of bitcoin with confidential transactions, while keeping the keys in multisig airspace wallets.
Since the layer on the Bitcoin chain will become very busy and quite expensive to operate, the use of Lightning and Liquid will be necessary not only to improve privacy, but also from an economic point of view to optimize efficient use of the Bitcoin blockchain. Frequent payment transactions will move to Lightning and Liquid, while on-chain transactions will occur for high value hodling, CoinJoin, and settlement purposes.
How to start:
This is a guest article by Moritz Wietersheim. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.