Tether launches L-USDT on Liquid Network

Tether launched a variant of its widely used stablecoin USDT on Monday on the Liquid Network, a Bitcoin side-chain. This makes it possible to exchange bitcoins for tether dollars directly without the intervention of a third party such as an exchange.

The Liquid Network is a fast side-chain for Bitcoin designed by Blockstream and has been around since October last year. At the moment it is mainly a network intended for bitcoin exchanges to exchange liquidity and enable fast arbitrage. Many transactions on the Bitcoin network take place between exchanges, partly to take advantage of the mutual price differences. To relieve the burden on the Bitcoin blockchain, that traffic can be moved to the lightning-fast Liquid Network.

Bitcoin side chain

What makes the Liquid Network special is that it is a Bitcoin side-chain. That means it is its own blockchain, but is linked to the Bitcoin blockchain. You can send BTC from the Bitcoin network to the Liquid Network. There they are held by the network and you get L-BTC in return, until you exchange them back for BTC on the Bitcoin network. In the meantime, you can use the possibilities that L-BTC offers on the Liquid Network.

This can be, for example, to make lightning-fast transactions, for example to an exchange or between exchanges. But you can also do so-called confidential transactions with it, which increase privacy because the transaction amount is protected. In addition, it is possible to issue digital assets such as shares, securities or other tokens on the Liquid Network.

Tether is now taking advantage of that opportunity to also issue its USDT stablecoin in the form of L-USDT on the Liquid Network. A stablecoin is a digital token whose value is (or should be) equal to an existing traditional currency. Tether’s USDT is the most popular “virtual dollar” right now. The move from Tether to the Liquid Network is promising because it opens the possibility for atomic swaps between L-USDT and L-BTC.

Exchange bitcoins for dollars at lightning speed

In simple terms, an atomic swap means that one token can be exchanged for another token in one action, without one of the two parties having to cross first. At the moment, this often requires an exchange as an intermediary, but with an atomic swap, the network takes over that role.

Thus, two parties can trade L-USDT for L-BTC with each other directly and without mutual trust. This could benefit the Over-The-Counter (OTC) market, where buyers and sellers deal directly with each other outside of the exchanges. L-USDT can also be a solution for other markets where peer-to-peer trading takes place, such as localbitcoins or hodlhodl.

It is also interesting that it is possible to build a Lightning Network on top of the Liquid Network. This is not so much about extra speed gains, but mainly because it creates the possibility to connect Liquid’s Lightning Network to Bitcoin’s Lightning Network, so that BTC can be exchanged via the Lightning Network for L-BTC or L-USDT without that it requires a traditional exchange. In addition, a Lightning Network provides an extra layer of privacy on top of the already improved privacy that the Liquid Network provides.

Supplement but not replacement

Despite all these benefits, the Liquid Network is not a comprehensive or definitive scalability solution for Bitcoin, nor a replacement for it. Although the Liquid side-chain is much faster and offers some advantages, the consensus model is different, and therefore the reliability of the network.

In contrast to the fully decentralized Bitcoin network, the degree of decentralization in the Liquid Network is limited to a few dozen network participants. So you have to trust them. In addition to Blockstream itself, these are currently mainly exchanges that already enjoy a certain degree of trust from their users.

The Liquid network is perhaps best viewed as an additional infrastructure. In it, the trust normally placed in a single party is spread across a consortium of exchanges and other participants. That is already a big step forward compared to trusting a single exchange, but still nowhere near as decentralized, reliable or censorship-resistant as the Bitcoin network itself.

Tether controversy

Also in the case of Tether’s USDT, a critical note is certainly not out of place. The ever-popular stablecoin has been discredited for many years and Tether is currently even involved in a lawsuit with the state of New York.

Last March, it also emerged that Tether no longer guarantees that every USDT is backed 1-to-1 with real US dollars. It is therefore questionable whether one USDT is actually worth a dollar. Owning USDT is therefore not without risk, because much depends on the reliability of the company’s guarantee behind it.

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