Allen Piscitello, VP Product of Blockstream joins me to talk about Blockstream Liquid as a new model for inter exchange settlement, and the possibility of building out new financial infrastructure in a way different from the legacy financial system. We talk:

Tradeoffs and differences between approaches of Lightning, Statechains, and Liquid

How pegging Bitcoin in and out of Liquid works

Features that Liquid’s blockchain has e.g. Confidential Transactions and Confidential Assets

How Liquid can enable much faster inter exchange settlement with different tradeoffs

How to get started developing on it

What the future of bitcoin market structure could look like with Liquid adoption

Allen and Blockstream Links:

Sponsor links:

Stephan Livera links:

Podcast Transcript:

Stephan Livera: Allen, welcome to the show.

Allen P: Thanks for having me on.

Stephan Livera: So Allen, I know you’re doing a lot of work with Blockstream and Liquid and side chains, so I thought it’d be great to get you on and just break some of that down for the listeners, but can you just start with a little bit of a background on yourself and what you’re doing with Blockstream?

Allen P: Yeah, so I’m the vice president of product at Blockstream. I’ve been there for about two years. I’ve been in the Bitcoin space for now eight and a half years. So I’ve been a big follower of Bitcoin and always wanted to get in the space and was really happy to join Blockstream. I’ve, I really had respected what they’d been doing for a long time and was fortunate enough to join. So I’m really excited to be there and be able to make a difference.

Stephan Livera: Awesome, and yeah tell us a little bit about what you’re working on these days?

Allen P: Yeah, so I oversee a product, so that’s, that’s basically, I’m the main ones we have there that we’re talking about our Liquid. We house have Blockstream green, which is our non-custodial multisignature wallet. We also have we work on the lightning network. We have a data feed with the Intercontinental exchange, which is the group that owns many different stock exchanges around the world, including the New York Stock Exchange. We work on Elements, which is the underlying technology behind Liquid. We work on blockstream.info. So that’s our block Explorer and Esplora, which is the technology behind it. And we also have a mining operation. So we do hosted mining for customers that are looking for secure hosting of mining all done in North America. So this is I’m trying to think if I left anything out.

Stephan Livera: Satellite.

Allen P: Oh, the satellite, of course. See, I’m glad you did your homework. Yeah, the satellite. So this is also being able to broadcast the Bitcoin blockchain from space, help prevent network splits and also troll people on the internet. Apparently with being able to pay for messages on it with lightning network. And it’s been really popular for people who hate lightning network to pay using lightning network to troll people. So it’s kind of a fascinating scenario that kind of evolved out of it.

Stephan Livera: It’s all happening, man. I like a lot of Blockstream’s projects and a lot of open source ethos around that and really contributing to the Bitcoin ecosystem. But today let’s focus in on side chains and particularly Blockstream Liquid. So can you give us an overview for let’s say a beginner, they know a little bit about Bitcoin, but they don’t really know what is a side chain?

Allen P: Yeah, so a side chain is a blockchain that runs in parallel to the native chain. And so in this case we have something like Liquid, which is its own blockchain. It has its own set of rules, but it has Bitcoin that can move into this system and can move back. So when Blockstream was founded, side chains really were the focus of the company. There’s a lot of different ideas and features that were thought of. That could be done, but it’s too hard to implement these new features. And maybe they changed the trust model or they do something that is not really possible to do in Bitcoin or, nor should it be done. But they’re interesting features. And so we saw sidechains as a way to implement these features. And the first side chain we created was Liquid. And this is a side chain based around assets and settlement of Bitcoin and trading applications. So it has a different trust model than say Bitcoin. It doesn’t use miners, it has a Federation that’s actually in control of it which allows for different tradeoffs and different features and different functionality targeted towards this use case where as Bitcoin can be fully trustless and decentralized. And you can take advantage of being able to move your funds in and out.

Stephan Livera: And I think one of the key points to understand is that there are different trust models associated with these things. So if we were to compare something like lightning, which is trust minimized let’s say, every transaction is fully able to be settled back down to the Bitcoin blockchain. And then there are some of those things that are sort of in the middle, like state chains. And then you’ve got side chains, which is, well, particularly the Blockstream Liquid model. Can you give us some of your thoughts and your view on how to think about those different trust models?

Allen P: Yeah, so there’s, there’s a lot of different trust models depending on what kind of layer you’re going on top of. So, you know, even if you, one thing you didn’t mention, you know, you have the, the oldest layer two solution in the book, which is deposit your money on the exchange and we update accounts as you trade things. And so that’s a fully trusted model. That’s kind of on one end of the extreme. It’s extremely fast. It’s extremely cheap. You’re trusting the custodian in this case to actually handle things. And on the very, furthest end away is, is native Bitcoin where you’re relying on economic incentives to prevent things like chain reorganizations or double spend attacks. So now let’s say you add in something like lightning. That’s an interesting example. Lightning relies on a reactive security model. What that means is you and your partner that have a channel have an incentive to behave honestly.

Allen P: Because if one of your parties does something incorrectly and ends up with more funds than they should have, you have the ability to, if you’re paying attention or someone else’s paying attention on your behalf can go and actually claim those funds back. And so this is something where, the security model is not perfect. There’s cases, if you’re not paying attention, you could lose your funds. But it is something where you don’t have to worry on any particular third party to protect your funds for you. Lightning does have other trade offs with that because you’re now having to have Liquidity paths to be able to send to anywhere. So it’s not necessarily as flexible with sending large amounts of funds to I would say like random places. So if you’re trying to send funds always to the same place in small amounts, lightning’s absolutely a great use case for that.

Allen P: Now something like statechains have a different trade off. And that’s a federated model. And I’m not an expert on state chains. It’s a pretty new thing that just came out. But the, the idea is you’d have a Federation and you can pass these UTXOs around. And as long as there’s no collusion between that Federation and one of the previous owners, you can’t lose funds. And then you have something like Liquid, which is a purely federated chain. And the funds go into this Federation. The Federation is protected through a set of, economic and reputational and incentives. So they basically don’t want, they’re getting use out of the network. They don’t want it to go down. And if something bad happened, you know, they would lose access to it. In addition, there’s also a hardware security model to it where the devices that are actually holding the funds have certain behaviors where they’re, they’ll, they’ll only release the funds in certain conditions, and it’s very difficult to tamper with these devices. So that’s the separate trust model. And so we’re, we’re Liquid. We’ve got, go ahead.

Stephan Livera: Oh, sorry. One other point to maybe would be good for you to just spell out some of the differences there is between Blockstream Liquids model and say something like Paul Sztorc’s, drivechains.

Allen P: Yeah. So drivechains is going to be something that is typically merge mined. And so what this means is the, you know, they’re, the funds disappear into this side chain and the way they get out of there is through a very slow process of miners saying that, you know, these funds are authorized to come out and there’s a very, very slow, I think it’s over several months process that they do this. And the idea behind that is the miners, you know, theoretically could say, yes, these funds are supposed to come out and they go to, into our pockets. And the incentive model there is either there will be some type of reaction from the markets to punish those types of miners. Or that it just simply there’ll be enough honest miners that tie the funds up. So it’s, it’s a different model. You know, it relies on incentives in some capacity as well. The state you know, originally Blockstream was looking at more of the mined solutions for a sidechain. But you know, especially back previously, it’s gotten a lot better recently. But mining has been very centralized. And again, that kinda ties into why we got into mining and why we’re, we think that more people should be into mining is that we want to bring that decentralization to mining. So these types of solutions become viable options as well.

Stephan Livera: Right. And so bringing it to Blockstream Liquid, then it’s a different model because now there’s no mining in Blockstream Liquid and the miners can’t steal from me. So let’s talk a little bit about, in some of these models who can steal from you in a sidechain model and what would it take for that to happen?

Allen P: Yeah, so in Liquid all the funds in are secured by a two thirds majority of miners. So in the case of Liquid, there are 15, and currently there’s 15 functionaries that are the ones securing it. And it needs greater than two thirds of them to be able to spend. So that means in order to spend that Bitcoin, you need 11 out of those 15 to collude in some way to spend that coin. And that would take, you know, getting into where the keys are stored, being able to extract them and maliciously act upon that. So that would be the only real way you could really do this. And that’s it’s a pretty massive effort because we do have this extra layer of hardware security in here. It also makes it very difficult, if not impossible to attack remotely.

Allen P: So it would take some collusion from someone from these different locations before anyone noticed as if someone noticed this and five of them decided, Oh, I’m gonna shut this down, it’s stopped and everything’s at least safe at that point. So it’s very difficult to pull off. And because there is a spread of this Federations across multiple continents, multiple countries. There’s no country that has more than three of these functionaries in it. So it’s very hard to even have any type of coordinated attack on this since they’re so spread out.

Stephan Livera: Right. And, and fundamentally we should remember it’s being used for different purposes. Right? It’s not intended that somebody keep their life savings on Liquid say, right. It’s the idea is that you would theoretically use it to move funds between exchanges. I suppose if you’re a trader and it’s like you’re already trusting that exchange to not steal from you anyway in the fully custodial model. And so then as I understand it, correct me if I’m wrong, it’s just a slightly different trade off. And in some ways it’s an improved security because now rather than just straight up trusting that exchange, you’re trusting that two thirds of the exchanges won’t steal from you.

Allen P: Exactly. So yeah, you’re basically trusting the strength of having all of these different exchanges. And again, the application really is focused around trading for the Bitcoin side of things. It doesn’t make a lot of sense that you’re going to keep your cold storage in Liquid. But for traders, they’re, they’re already having to go through very similar tradeoffs anyway. They’re having to leave their funds on exchanges for long periods of time because of how long it takes to get funds on Bitcoin and just because of mining even if there’s no congestion, you may have bad luck and there is no block for an hour or longer. And that happens, you know, typically every day there’s, there’s at least some time period where there’s no block for an hour. And that’s, that’s normal. And what Liquid gives you is that reliability that’s needed for trading, where there is a block every minute.

Allen P: And we can guarantee that because there’s a Federation that runs off of the timer and there’s not the proof of work or cost of doing that. So there’s no randomness in it. It just happens every minute. And if you’re a trader, you know, by the time you get two confirmations in Liquid that’s considered final. And so now you’re, you’re moving funds very quickly. You can move it between exchanges. You can move it into your own wallet. To basically hold as a extra security measure, you know, if you’re not actively trading. And so that’s why you know, the Bitcoin aspect of it is, is very heavily focused on trading. Of course you have other assets too. And the security model for those is also slightly different. Because there’s, you know, with any kind of digital issued assets or something like a USDT tether, is on Liquid.

Allen P: And the risk there is, is even much less. So, you know, in that case, there is no asset underneath it to protect at least on a, on a blockchain. There’s presumably funds locked safe in a bank account somewhere. And in that case, you know, the worst thing that the Federation can do in that case is create a fork that is more than two blocks. And in that case, you can detect it, freeze everything right at that point. And you know, anyone who held that asset on that chain could, you know, go back to the issuer and they could move their asset to like a different blockchain. So if this case, that’s the worst case scenario is you basically freeze up and you stop, you halt and you exit the chain. So it’s even a better security model for those that types of assets.

Stephan Livera: Great. And so, yeah, that, I guess that’s a bit of an overview of what it is. Let’s talk a little bit about the typical users. So as I understand it’s exchanges. It’s traders, it’s brokers these kinds of parties. Who are the typical users?

Allen P: Yeah. So that’s exactly right. So that’s kind of the primary use case that we started with was being able to trade assets and being able to move funds around very quickly. So, you know, being able to move the Bitcoin from one side to another and being able to move any type of stable coins that are issued on the platform. Besides that, you know, the other, the areas we see a lot of potential and interest is in the idea of digital securities. So something like, issuing a security token on Liquid. This is something that there’s a significant interest issuing an asset that represents some type of commodity like gold. We’ve seen several people interested in that type of use case. And the other big use case as well that we’ve seen recently is from kim.com and launching on his KIM platform, a native token for that platform that would be on Liquid.

Allen P: So there’s, there’s just a lot of different use cases for assets that would in fact, you know, someone that wants to use that token to pay for content certainly could do that. And that’s all using Liquid. And of course the other big project too, is the Pixelmatics infinite fleet game is going to be issuing their token on Liquid. And so that’s a gaming token. So you might see it in, you know, a wallet that you have related to video games. So that’s pretty wide range of users.

Stephan Livera: Got it. So yeah, let’s come to that, come to those specific tokens a little bit later. Let’s talk a little bit about pegging in and pegging out. So as I understand there is BTC just on my normal Bitcoin blockchain and then there is L-BTC and then the idea is that you can peg into the Liquid chain and then coming back out. It’s a peg out. So can you tell us a little bit about what that looks like?

Allen P: Yeah. So when you want to move Bitcoin into the Liquid network from the Bitcoin blockchain, you need to create first what’s called a peg in address. And so you use your Liquid full node and you can generate this address. And the way that that works is it actually when you create that address, the Federation has no idea that that address even belongs to them. So it’s done using a technique called a pay to contract hash. So you basically, you specify the conditions that you want to be able to spend that Liquid Bitcoin, which is basically, you can think of that as like your Liquid address and you use that Liquid address to modify the address of the Federation in a certain way. And so what you do is you send the Bitcoin to that address, the Federation at that point still has no idea you’ve sent them money.

Allen P: So the example I always use is imagine you have a very large piece of property and you don’t really have, you know, you’re not watching it and someone goes, sneaks out of your yard when you’re not there and buries, a bunch of gold coins at one exact location on it. And so the gold coins are there, but you the property owner, have no idea that they were left there. Then you go into the Liquid blockchain after it’s settled, after it’s been there for a hundred blocks and you can create a peg in claim transaction. And this peg in claim transaction is basically the equivalent of giving someone a map to where those gold coins are buried. And so by giving him the map, which is in this case, the contract hash, you’ve proven to them, this is exactly, the conditions that I deposited them at and now you are now credited with that Liquid Bitcoin.

Allen P: So now you have this asset that can be spent on the Liquid network. I don’t know on the other side, you need to move those funds out. And the way that that works is you have, you would create a special transaction that says, I would like to send Bitcoin out to this Bitcoin address and I am destroying this Liquid Bitcoin. So it’s kinda like a, a burn of that asset. And along with that just for security reasons I mentioned that there is hardware security on, on this Bitcoin wallet. There is a white list for that peg out. So this is just something that is restricted to users of the Liquid network. Now we have plans to expand that in the future with a different security model for anyone to be able to peg out without having to necessarily go to an exchange or anything like that. So this is a way to keep flow. If there was, you know, an imbalance or people needed points out of Liquid they can always move them back to the Bitcoin blockchain.

Stephan Livera: Got it. And actually would you mind breaking that down a little bit in terms of what the different types or users are? So I can see from the technical overview documents you’ve got here, there’s functionaries and then there’s participants and then there’s general public and they’ve got different things that they’re allowed to do. Right. So for example, anyone can peg in BTC to L-BTC, but in terms of peg out L-BTC to BTC, it says here functionaries and participants. So could you just break down who is participants in that model?

Allen P: Yeah, so when we’ve launched Liquid, there was a fixed set of functionaries and the way it was designed at that time was that there would be a fixed membership set of up to 15 of them. And we filled up that membership set. We still had more people interested in Liquid and they still wanted to be able to use it. Now we weren’t able to change the Federation at that time cause it had already gone live and launched and had this maximum size configured in it. But they did have the ability to be added to this white list. And so this is where we have additional members of the network. Many of them would like to be functionaries and that’s something we planned for in the future. But they have the ability also to peg out. Besides that Liquid is accessible to the public, you can download a full node of Liquid. It’s very similar to Bitcoin and you can do everything else, you know, including issue assets, peg in, send transactions around. You can do all those things without any permission from the rest of the network. The only thing you need is you need some Liquid Bitcoin to be able to pay transaction fees.

Stephan Livera: Got it. And I guess you can just get that by pegging in, right?

Allen P: That’s right. Yeah, you could peg it in Bitcoin and that, that is a slow process that takes about a hundred blocks to wait for that to confirm. Or you could get that just directly from an exchange. So there’s a number of exchanges that are currently integrated. You know, you could, a lot of them, it’s very simple. You can just, you know, if you have a Bitcoin bAllence there, you could just request that they pay you in Liquid Bitcoin and they’ll treat it as the, you know, the same asset. You don’t have to trade for it or expect a different exchange rate or anything like that. Most of the exchanges are very friendly with this.

Stephan Livera: Great. And so there are some cool features that are available on Liquid that are not yet in Bitcoin or maybe they’ll never get into Bitcoin, but they are interesting and potentially can be like a trial run to see if maybe they would be handy to come into Bitcoin at some later date potentially. So for example, Confidential Transactions and Confidential Assets. So as I understand what that’s doing is you are blinding the amount of what you’re spending. So could you outline a little bit around what the benefit of that is for Liquid users?

Allen P: Yeah, so the main benefit in Liquid users being able to shield that information from the public, is there’s a lot of information revealed when you’re sending Bitcoin transactions. So there’s, I’m sure a lot of your listeners have seen Twitter accounts that have like these whale watch. So it says like, ah, you know, some user just deposited 10,000 Bitcoin on a Bitfinex and you know, the user who’s doing that has to wait for confirmations. Meanwhile, everyone in the world who’s over at Bitfinex is like, well, someone brought some Bitcoin here. I bet they’re going to sell it. I better sell some of mine first before they do. And the price goes down and you end up, you know, losing a lot of your potential position because of this information leaking. And so that’s something that’s really important.

Allen P: And of course there’s other privacy aspects as well. If I am an OTC desk and I’m trading with another OTC desk and they start to see how much of my funds I have. So if I, send a Bitcoin transaction, I have to reveal to the world sometimes how much I have a very minimal of what that UTXO is to know, if I’m spending 10 Bitcoin and getting back seven is change and giving you three, well now you know, I have seven more and that might influence you know, some of your behaviors. So Confidential Transactions is really important for making sure you know, your competitors don’t necessarily know what’s going on or people that are trading against you don’t know what’s going on. But still having two really important features. One is that you can still verify the correctness of the system.

Allen P: Whenever you see a transaction in Liquid, although the amounts are shielded you can still verify that, you know, the inputs and the outputs all add up to the same value using the cryptographic proofs that are provided. And then on the other hand, you also have the ability to share that information with any third party that you need to share it with. So I could, let’s just say I needed to go show my auditor you know, what my trade actually was. I could give them what’s called a blinding key and they could go in and look at that transaction and actually uncover what was actually being sent and get enough information to prove without even, without trusting me, completely independently verifying that it was correct. So that’s something that, you know, we do have that functionality.

Stephan Livera: Yeah, that’s really interesting. And I think I like that one about how you can basically mask what you’re sending into an exchange because over time people figure out what is the exchange cluster of addresses and then they start doing blockchain analysis and then they start saying, Oh look, there’s 10,000 Bitcoins going to BitFinex or whatever. And then obviously because of the general way people act, from a security point of view, you wouldn’t put, you wouldn’t keep Bitcoins on there unless you want it to trade. And so if you’re sending Bitcoins to the exchange, it’s very likely that you’re going to do a sell. So then it just becomes a bit of fun and games, let’s say, in the markets when that happens. And did you want to also touch on Confidential Assets?

Allen P: Yeah, so Confidential Assets is an extension of Confidential Transactions where not just the amounts are hidden, but even the asset itself is being sent. So if you look at a typical Liquid transaction, we support Liquid on a blockstream.info. And it’s really interesting looking at it from a Block Explorer because, normal Bitcoin block explorer, you’re learning a lot of information about it. You look inside of the blockstream.info and it says, you know, all you see is a bunch of addresses and confidential and you don’t, you know, this transaction could be sending Bitcoin, it could be sending tether, it could be sending, you know, SLP coin. You could, you could do whatever you wanted and no one would know the difference. And so the only thing they know is the inputs and outputs match. So this is a good way, you know, just obscuring a lot of information about what’s trading.

Allen P: So if you’re buying a bunch of security tokens you may not want to necessarily reveal that to the rest of the world that, you know, you bought a token for Apple stock or whatever token is going to be on Liquid. You may not want to reveal that. And so even if someone knows your addresses, they still would just see that you received something, but they wouldn’t know what. Gotcha. And with, as I understand, Blockstream has Blockstream Green, which is a iPhone and Android wallet application and it’s also got support for Liquid. So could you tell us a little bit about the support for that?

Allen P: Yeah, so you can send and receive Liquid assets directly from your mobile device on blockchain green and soon to be on a desktop version as well. So we’ll have, we’ll have everything covered by then. And so the real advantage here is you can, you can go in, you can see your Liquid assets, you can still have everything protected by two factor authentication. And so if you’re, you’re trading on an exchange this is a good way to be able to move things on and off and not have to, again, trust that exchange when you’re not actively trading. So this is a common way to do that. And you know, we should see some hardware wallet support coming very soon as well to add to it. Blockstream Green already does support hardware wallets for Bitcoin, but the Liquid side is coming very soon. Great. And now how does creating a new tokenized asset work on Liquid? Yeah, so unlike Ethereum where you have to create a smart contract to do this, the assets are built in at the native level.

Allen P: So in terms of like what’s in your wallet in the APIs, this is exactly the same for having a Liquid asset as it is for having Bitcoin. So really issuing is very simple. You just call a single command. If you’re using the RPC calls and say issue asset, you tell how many you want to create, you say whether you want to create more of them in the future and whether you want it to be confidential or not. And once you do that, it’s in your wallet and then you have the ability to, if you chose to create more at a later date. So something like a stable coin, you generally want to, increase the, the amount in circulation based on your deposits. So that’s why you might want to do that. And then you can also burn them when you’re done using them.

Allen P: So it’s all very simple API calls, no complexity of a smart contract. Again, that’s what most people were using ethereum and other platforms like this before, was just all this complex smart contracts just for creating an asset. We have it right in there at the base layer. So that makes it really easy to send those transactions as well and really ties into an important feature which is the atomic swap. So this is the idea that because everything’s at that base layer, you can create one transaction that we could interactively work with. So that you could send me, say, like tether USDT and I could send you a Bitcoin and neither of us have to trust each other and we just execute this single transaction and the outputs are just switched. And now we’ve done the trade.

Stephan Livera: Let’s talk about some of the other potential uses in practice as a, I’ve seen, for example, I think Francis Pouliot from Bull Bitcoin was talking about the idea of doing L-CAD like Liquid Canadian dollar and then basically using that as a way that people can trade around Liquid Canadian dollars as opposed to, you know, real Canadian dollars. Can you tell us a little bit about that process? What does that look like around using stable coins on Liquid?

Allen P: Yeah, so again, we had you know, tether was one of the first ones we have in here. We also did a stable coin project with a Japanese company called Crypto Garage, and they did a JPY token that they were doing as part of a pilot program there. And of course Francis’ Canadian dollar project there with Bull Bitcoin. So basically Heather’s been around a long time, so that’s a pretty similar use case where you can just send and receive it, swap it, the Canadian dollar one, I believe they’re doing it as more of a voucher system. So it’s a way of getting money into the exchanges and of course people may keep a bAllence of that and be able to do swaps and trades and move between exchanges very easily. The nice thing is for the exchanges, they don’t have to you know, build infrastructure that’s any different. Once they can accept Liquid Bitcoin, they can accept any Liquid asset, with as much ease as everything else. So that’s something that’s a really easy for the exchanges to do.

Stephan Livera: Got it. So in that sense, it can really, if I understand you right, it can reduce the compliance cost and the effort required for that exchange to support. So let’s say this exchange wants to support L-CAD now it’s much easier for them to do that rather than having to support, if say they’re not in Canada they don’t want to go and set up a Canadian bank account, they can just support Liquid. And then now anyone who’s got L-CAD can go through that exchange. Correct? Absolutely.

Allen P: Yeah, that’s definitely a very common use case that we have here. And actually, one of our other Liquid members as well is a XBTO. And they have a product that they’re launching called stable house. And this is even another way to kind of swap these different stable coins out. So if you’re in Canada and you want to trade somewhere with a US dollar, you could get this LCAD voucher. You could send it to someone who could swap that dollars on almost like a forex market. And then you have now this USD Liquid coin that you could go bring to any exchange that does that. And vice versa. If I don’t, if I want to go trade it, bull Bitcoin and I want to market make, well now I’m just need to get this L-CAD. I don’t need to open any kind of a bank account to do that. So really we’ll kind of open up the and consolidate the global markets and something where we’ve seen prices differentiate tremendously based on locale. And especially where there’s strong capital controls. And so this is something that could potentially help make it so you know, the markets are all fairly priced around the world and you know, we don’t have situations where one country’s people have to pay a higher price for Bitcoin than others.

Stephan Livera: Right. And as I understand it, it also helps in some sense make finance more permissionless because now you can kind of do it all through Liquid in a programmatic way that is a little bit more open and free as opposed to the traditional fiat out banking route, which is very AML, Sanctions, etc, Compliance heavy.

Allen P: Yeah, absolutely. And again, you can create tokens to be as free as you want them to be on Liquid. So there are tokens that can float freely and can go to anyone, any amount. But there are tokens that sometimes need some restrictions on them that, you know, are only allowed to go to certain players. So, you know, we have like the idea of security tokens, they may only be allowed to go to accredited investors. And so you could use you know, build tools on top of Liquid that have those types of restrictions in them as well. So, you know, we don’t necessarily want to advocate for one model or another, but you can do, you know, we can do whatever you want on Liquid. And that’s, that’s really about empowering users to build the tokens and then letting the market kind of decide what, what is there demand for.

Stephan Livera: Yeah. Actually, I’m, it brings to mind this other idea. And I was having an offline chat with Jameson and he mentioned this idea and I was intrigued. He was saying actually, why doesn’t anyone use Confidential Transactions inside Liquid’s blockchain to do their own mixing and then like peg it back out into Bitcoin on chain because it’s kind of been mixed in that sense. So that’s another idea. I mean it’s kind of, these are ideas that could be taken and run with, right?

Allen P: Yeah, absolutely. And again you still have traceability in Liquid of address linkage. Although when you have a large set of transactions, it does become a little bit harder. And, you know, even doing things like trying to figure out, you know, when you’re doing swaps, you’re mixing people’s wallets and those tend to throw a lot of these services that are trying to examine and identify who things are that it could happen. So yeah, you could definitely, you know, build combine something like JoinMarket on top of Liquid and you get a really powerful system of of being able to get fungibility back to your Bitcoin.

Stephan Livera: Yeah, that’s really cool. And I think the other big one is just the reduction in the risk. The time so for example, a trader might think of it like, I don’t need to leave coins on the exchange. Now if I’ve got them in Liquid, I can just one minute shoot them into an exchange and do trading. So there’s a bit of a, there’s more options for traders if they want to do that around not leaving their coins on the exchange.

Allen P: Yeah, absolutely. And so that’s I think the first step, you know, that we’re all about trying to get things iteratively better. In terms of trust. And again, the first thing is, let’s not leave coins on exchange if we don’t have to. Liquid really enables that use case. So you can now, you know, move them into this trust model of a large Federation. Now instead of a single exchange in a longer term vision, there’s even a point where you can have the exchanges operate without ever holding your coins at all. And so that’s where kind of our ultimate goal is with Liquid where exchanges, and this is something that exchanges, don’t even like having to hold your coins. This is a major hassle for them. It’s a major risk. They’re big targets cause everyone knows they have all the coins.

Allen P: If you have a system where all the traders individually have custody of their own coins, this frees them up to just do what they do best, which is, you know, know their customers, be able to onboard customers, have customer service and run these order books. And so that’s something that, you know, through Liquid, through the issued assets, through even other features that we find on adding in there, like Simplicity that you’ll be able to have operate these exchanges without ever having custody of the funds. So that’s something that we think will be kind of like the, the long what will happen in the long run with these exchanges. And again, that’s something we’re building towards.

Stephan Livera: That’s really interesting. And in terms of longer term vision, other commentators in this space have mentioned how currently it’s a bit odd that Bitcoin exchanges basically are an all in one thing right now because they’re the exchange and they’re also the custodian and they’re are also like the clearing house and it’s not really a split up like in the traditional side of the stock market world. I see a potential there that Blockstream Liquid helps create some of that market structure.

Allen P: Yeah, absolutely. So, so a lot of the old financial system is really built around trust and that’s kind of on necessity. You know, if you go back to the really olden days of the financial system, you kind of had a system that was more like what we see in Bitcoin today, which is, you know, if I wanted to trade stock with someone I would have a paper share and they would have you know, a cashier’s check or something for me and we’d trade it. And the way the stock market evolve that just, that system just broke, it didn’t happen. And so the solution to this was, well, we’ll just put everything all in one basket. Everything’s all in the central depository that holds everything and we’ll just settle everything that way. And then it that broke.

Allen P: And then we had to go on and go to separate and we’ll say, well, by the way, we’ll just have one company own all the stock and you just own rights to it. And so that’s, that’s like literally what we have today. And so it’s, it’s all built on this level of trust. There are a lot of components of those middlemen that really can be replaced through, through the blockchain itself, through smart contracts, through some of these rules that, that can exist and serve those purposes, but without the overhead of operating them. So that’s something where something like Liquid, you know, Bitcoin block is kind of the start. Yes, we can go to more clearing house models and some people are going in that direction and custodian models, but I think that’s just kind of recreating the old system. I think we can, we can do better. And that’s something where Bitcoin, where you have no private keys and you have cryptography to be able to safely transfer things, we don’t have to build that old system. And that’s kind of why we’re trying to build it with a differently with new technology that that will not need as much trust.

Stephan Livera: Yeah, that was well articulated. I liked that explanation. Another question that is on my mind, and I’m sure many listeners are thinking this as well, is obviously we’ve seen what happened with 2017 and all the shitcoin scamming that went on. And I guess there is that question of: Will Liquid be another vehicle for people to do their own version of that, but just on top of, Bitcoin and Liquid’s blockchain. But again, in fairness as well, it’s, I can see that it’s like a neutral tool and some people will use it for good and some people use it for bad. What’s your view?

Allen P: Yeah, absolutely. It’s if you build technology that is usable then there will be people that use it for good purposes and there’ll be people that can use it for bad. I do think there’s a good chance that people are starting to wise up on some of those types of projects and are actually kind of seeing you know, I actually kind of really would like having something at stake here. So some of the evolution of these projects is getting better. I think you’re getting actual revenue from a business that’s generating value for you and it’s just represented in a digital, you know, a blockchain format rather than something that you might’ve had, you know, more traditional assets. So I think, you know, we will see scam and stupid. There’s different scales. There’s like pure scams, there’s just like bad ideas and then there’s like reasonable things that can happen.

Allen P: And so we’ll see all of those on, on any platform that really has any functionality. So I think, I think maybe that’s a sign that Liquid’s doing well is when you start seeing scammers start moving over to create more coins on it.

Stephan Livera: Bring the scams back to Bitcoin!

Allen P: It’s going to happen, it’s going to happen. And again, that’s why it has to be a neutral platform. It’s something that, you know, anyone can create these assets and it’s up to the investors or the people buying them to understand what they are. And that’s, part of what we’re doing is trying to make it as hard you make it so you can protect yourself from these types of scams. So there’s like some blockchains that do these types of assets and you can like create a name for it and well, that’s really easy to create something that sounds similar and scam someone, so we don’t have that in Liquid.

Allen P: We just have asset IDs. And so it’s your responsibility to kind of verify that. And, you know, we, the usability of that is not very good. And when we wanted to add asset names that are convenience inside of our green wallet, what we did was create an asset registry that’s tied to a domain name, you know, so if you own tether.to, you can register an asset that shows that that’s from that website. And as long as you have control of it, I know I’m actually getting USD T if I have a, you know, coming from a domain and something else who knows what it is. So, you know, we do what we can to make it harder for people to scam. Or at least but you’re never going to be able to stop it all unless you have a completely permissioned system. And that’s, that’s really something we don’t, we don’t want to be be in the part of, of doing is trying to vet these things and do it. It needs to be open for everyone and, and hopefully the market will wise up and avoid scams more in the future after seeing what happened before.

Stephan Livera: Precisely. So it’s buyer beware. One other question I had just off the top of my head was around reorgs. So I guess, sorry, back up a step. So with pegging in and pegging out, as I understand, there’s like a timer on that. Is there an impact on if there’s a deep Bitcoin reorg? So let’s say it’s unlikely. I don’t think it’s ever happened like a deep re org, but potentially would that mess with the security model?

Allen P: Yeah. So everything in Liquid, is very conservative in terms of the threat model for, for Bitcoin. And we allow for reorganizations of up to a hundred blocks. So, you know, if you think about what’s happening, if you had a reorganization of even something like six blocks, that would be pretty catastrophic to a lot of exchanges. We’ll handle that just fine. We’ll handle 20 blocks, 50 blocks, no problem. Now if you get this catastrophic hundred block reorg, that’s where a lot of the kind of security assumptions of Bitcoin really start breaking down. And so one thing is even when you have these reorganizations in Bitcoin, all transactions that were valid will still be valid in the future, on top of the reorg unless someone intentionally double spent them. So that’s something that is kind of just a general assumption because we already happen you know, maybe the network got cut off in China for, for a day and they ended up creating a blockchain that was longer than the rest of the world.

Allen P: You could have a very large reorg there and there’s no malice, there’s no bad intent. It’s just something that could happen. And that’s where something like, you know, Liquid could, would be able to do okay, but all those transactions would replay. Now, theoretically, someone could double spend like a peg-in attempt or something like that, and that’s where you could get into trouble. If it was beyond a hundred blocks, if it’s a hundred blocks or less than a hundred blocks, everything will just chug along just fine. So yeah, if we do see the a hundred block reorg it will be a lot more than Liquid feeling pain. It will be pretty much the whole ecosystem will be hurting. Yeah. I don’t know what the value of Bitcoin would be at that point. If someone actually did those types of attacks, it would, it would probably hurt a lot more than, than any loss in Liquid.

Stephan Livera: Right. And we would probably say any deep reorg of that nature would be so, so, so extremely difficult to pull off unless there was some kind of unknown technical problem or break in the cryptography or something. Right. Okay. So one other thing, while we’ve got you here, we might as well break that down a little bit further in terms of the functionaries. So as I understand there’s, so I can see here there’s block signer, Watchmen and then hardware. Can you give us a little bit of a brief on those? Yeah, so,

Allen P: So there’s a couple of different roles that the functionaries play and, and in theory they could be split up. They could be a different set of people. But in our case they are all identical. So the functionary itself is a server. It’s a very standard stock server that you’d like see in any kind of data center. But attached to it is also the special key module or HSM that actually stores the sensitive material on it. And so this server is running and it’s going to do two things. So the watchman’s job is to maintain the balance of Bitcoin and make sure it’s correct. So what it’s gonna do is, you know, when someone claims that there’s a peg-in, it’s going to go out and validate in the Bitcoin blockchain, is it actually, did we actually get paid?

Allen P: Is it actually under our control? Does everything check out? And if it does, it’s going to say, okay, well now we’ll keep track of these funds and be able to use them to spend on payouts. And it’s also watching of course, when someone makes a peg out claim on Liquid and says, is this peg out claim valid? Did they actually have the, the Liquid Bitcoin, is that transaction valid? Is the address that they want to send it to a valid Bitcoin address and is it on the white list? And they provided the proof that it’s on the white list correctly. So that’s what the Watchman is doing. It’s basically, you can think of it as like the wallet for for, for the functionary. The other side, you have the block center and the block center has a pretty simple role. You can think of it like the miners are for Bitcoin.

Allen P: And so what they’re doing is they are seeing transactions that come in, that end up in their men pool and they alternate. So they take turns. It’s a Round Robin process. Each one takes a turn every minute. So with the 15 of them, they all have their, you know, they each go four times an hour and they’d make a selection of the blocks. And so they will create the block and they will send that block to all of the other block signers and the other block signers will then pre commit to it. So they’ll say, yes, I’m going to sign that block, or no, I won’t because I don’t think it’s valid or for whatever reason, or just no response. If they’re, say offline. And as long as a total of 11 of them agreed that this would be a valid block, the block signer or the creator one of the block signers and that case will go actually make the block with the right format and ask those 11 to sign it.

Allen P: And once it does, it now becomes a valid Liquid block and they start working on the next one. It goes to the next cycle. So those, that’s the other part. And again, the hardware itself, these are just servers that are, locked up in data centers around the world that have software that are doing these these parts of it. And then of course, the, the last component is the key module. And what it’s doing is it has a very limited interface to the world. And so it’s talking, it’s getting very limited feedback over you know, secure channels that are very hard to say take advantage of exploits on. And so it’s setting information into its for very specific actions. But that means it can’t validate everything that would be validated say on the, the main part of the server.

Allen P: So on the Watchman side, it’s just what it’s doing is it’s signing Bitcoin transactions that are either paying itself or that are paying people on the white list. So that’s all it will sign. So if it’s just paying itself, that will do that periodically to refresh the funds or if someone requested a peg out and on the block signing side what it’s gonna do in that case is it’s keeping track of the last block it has signed and it’s kept keeping track of the height that it last signed. And it’s making sure that the blockchain only moves forward. So it, you know, you can replace the last block. There’s, there’s kind of a reason you don’t want to deadlock if there was, you know, it thought it’s signed something but it didn’t actually make it to everyone else.

Allen P: It does need the ability to replace the same, the last block as long as it has the same parent and then it will just keep signing the blocks, making sure it’s moving forward. So this is something where, you know, it is designed to be isolated so that if someone for, you know, as much as these machines are locked down and access is restricted, even if someone could hack into it, they still can’t get the signing to do anymore than what it already agrees to, which really limits the potential damage that could happen.

Stephan Livera: Yeah, it’s an interesting way. It’s been set up in such a way that yeah, it’s more difficult to kind of steal out of it. Let’s talk a little bit about Blockstream Liquid. From the point of view of developers. So let’s say there’s a developer and they’re thinking, okay, I want to fool around with this and play around with it. What are some good ways to get started?

Allen P: Yeah. So you can download elements from elements project get up. And this allows you to run a full node in Liquid, just like you’d run a Bitcoin full node. And so it can, it comes with, it’s almost exactly the same as what you’d expect with Bitcoin, where you have the daemon and you can have the RPC interface just like you would if you’re programming Bitcoin. All of those Bitcoin libraries that know how to call the Bitcoin RPC calls can also call into Liquid. So, you know, if you’re using Java script or you’re using go or you’re using Python, you basically go into all the resources that you’ve seen for Bitcoin. And also now just change it to a different port and now start communicating with it and doing Liquid. And of course, there’s also the the elements QT application, which is similar to Bitcoin QT, which is the graphical user interface to be able to use this.

Allen P: So if you wanna start programming away first thing I would say is, is learn how to do it for Bitcoin. And if you’re already familiar with Bitcoin, that’s gonna be really natural for you because it’s basically the same API except for support for things like assets. So if I want to send a transaction to you, I just need to now specify exactly what I send in Bitcoin, but what asset I wanna send you. So that’s, and then of course there’s extra API functions for things like pagans and creating assets and all that. So the best resource on that to get started we have docs.blockstream.com has, has some good tutorials of walking through of how to get started, how to set up your node. If you’re using Mac or Linux or windows you can, you can run a node and start interfacing with the network as a, as a developer.

Stephan Livera: Fantastic. Look, I think that’s most of the questions I had. Is there anything else you wanted to bring up around Blockstream Liquid?

Allen P: No. So we, we just got back from Tokyo last month. We had a Liquid Federation meeting. If you’ve followed some of the people like Samson on Twitter you know, pretty big response there. It’s a lot of excitement from the community. We are, there’s a lot of interest in, in assets. I think that’s something that’s, that’s really starting to pop up. We have, we have the asset registry and I keep going there and it just like does list growing. And it’s amazing when people, I don’t even know who they are, that they’re even doing anything and they’re starting to get involved. So I think it’s really starting to take off. You know, it is one of those things where it is building that network effect. And you know, as we’ve reached our one year anniversary of Liquid it’s really started to hit that inflection point where starting to take up in terms of usage and assets. So I expect the next year to be really big for, for Liquid.

Stephan Livera: Awesome. Well look, I think that’s pretty much it for this episode. So just make sure you let the listeners know where they can follow online and keep up to date about what’s going on with Liquid?

Allen P: Yeah so follow the Blockstream Twitter. We’re always tweeting about all the different things we’re doing in the Bitcoin ecosystem. Just we’re very frequently at conferences all around the world and it helps that we’re a very global company on many continents, even Australia and can attend a lot of these different events and have engineers everywhere. And so yeah, keep an eye out for events in your area, follow on Twitter. Obviously our website blockstream.com or block Explorer Blockstream.info, if you haven’t switched to using it yet, strongly recommended, it’s the best one out there. You can even run it yourself. And of course Liquid itself. Download a node and start exploring.

Stephan Livera: Fantastic. Well, thank you for joining me today, Allen.

Allen P: All right, thanks Stephan.