Blockstream, a bitcoin technology startup has announced the first commercial application of the bitcoin sidechain known as Liquid. This company, which has a team comprising of well-known architects of this crypto-currency, said that the new product based on the ideas in the sidechains white paper, will be launched in first quarter of 2016. Here is a brief discussion on the new technology and its effect on the bitcoin price.
Liquid – The Proposed Accelerator of Bitcoin Transactions
Liquid is designed to serve bitcoin exchanges, traders, and payment processors by decreasing the time it takes for the transfer of bitcoins from one account to another in these institutions. Initially, Blockstream and five other bitcoin exchanges: Xapo, Unocoin, Kraken, BTCC and Bitfinex will make use of Liquid. This private sidechain will allow each of the partner exchanges to move funds between their order books without transferring funds on the main bitcoin blockchain.
The Bitcoin Magazine claims that Liquid will offer instant transactions, and provide a fast settlement layer for exchanges and brokerages. According to Austin Hill, the CEO of Blockstream, due to the rising demand for bitcoin and the increase in the daily number of transactions on these exchanges, the capital needed to maintain balances at these exchanges is very high. Hill said that traders cannot accept up to 60% of the trades they should make because of the settlement lag. He contends that Liquid can cut down the time required for funds to be transferred between exchanges from 1 hour to a few seconds.
The bitcoin exchanges involved will participate actively in the operation and development of the sidechain, but they will also be clients of Blockstream. This means that they will be required to pay an undisclosed subscription fee every month. Hill believes that Liquid is the pioneer of many other commercial sidechains that will emanate from Blockstream and other users of its software.
Liquid is a new concept that is expected to boost the functionality of bitcoin. It allows assets to be transferred from the bitcoin blockchain to and from an alternative blockchain (called a sidechain) with the help of a 2-way pegging system. When these assets are on the sidechain, they can be governed by another set of rules. But they will still retain their ability to be moved back to the main blockchain at another time or date. Thus, this new technology will add value to the bitcoin blockchain by increasing its utility for payments that have been limited by the long confirmation time.
Bitcoin Price – The Effect of Liquid on the Bitcoin Price
Industry watchers and commentators on the bitcoin crypto-currency have put forth many reasons for the frequent fluctuations in the bitcoin price. These factors could be grouped into seven: the rate at which people buy bitcoins, the number of people converting their bitcoins to other currencies, the dumping (conversion) of bitcoins to fiat by large businesses, reaction to a major news story about bitcoin, and government regulations in the world’s biggest economies. Therefore, what will be the effect of the launch of Liquid on one or more of these bitcoin price determinants?
Bitcoin price will rise due to the significant reduction in settlement speeds, increase in bitcoin liquidity and trading activity among exchanges. Consequently, all the exchanges operating the new sidechain will handle a greater volume of trading and more people will be able to buy bitcoins. In fact, this increase in bitcoin trading will not be limited to exchanges. Payment processors, merchants and traders will also enjoy the benefits of the faster transactions. That means that there will be an increased demand for bitcoins as a medium of payment online. Thus, more people will buy bitcoins at exchanges and the bitcoin price will rise.
Faster bitcoin trading will also encourage brick and mortar stores to start accepting bitcoin as a mainstream payment medium for goods and services. This is expected to happen shortly after the launch of this technology as more major retailers discover the power of bitcoin. Xapo, one of the exchanges involved in the initial launch of Liquid is already offering a credit card that permits you to spend bitcoins in stores that accept regular debit cards. Other exchanges are also expected to offer such products to spread the use of bitcoin as a viable currency.
In summary, since the total supply of bitcoins in circulation is limited to 21 million in 100 years, an increase in demand, caused by the use of Liquid for faster trading and account settlement, will lead to an increase in bitcoin price in the short term.