The Liquid Network is a Bitcoin layer-2 solution and sidechain, which means that bitcoin (BTC) can be transferred from the Bitcoin mainchain to the Liquid sidechain (“peg-in”) and back again (“peg-out”).
BTC transferred to the sidechain are known as Liquid Bitcoins (LBTC) and operate on a different security model to BTC on the mainchain.
Note: The amount of LBTC on the Liquid Network is always verifiably backed by an equal amount of BTC locked on the mainchain.
How Peg-Ins Work
Anyone can initiate a peg-in with a Liquid node. The peg-in process involves sending BTC over the Bitcoin network to a peg-in address that is controlled by the Liquid Federation. After 102 confirmations, the equal amount in LBTC can be claimed on the Liquid sidechain. The high number of confirmations is necessary to ensure the network isn’t affected in the unlikely event of a chain reorganization on Bitcoin.
A peg-in is the only way to issue new LBTC on the Liquid Network.
Not All Users Need to Peg In
While it’s possible for anyone moderately technical to initiate a peg-in, most users will prefer not to due to the abundance of convenient options available for exchanging BTC for LBTC. For example, many exchanges peg in large amounts of LBTC ahead of time in order to facilitate the fast and convenient exchange of BTC and LBTC for their users.
Peg-Outs
A peg-out involves burning LBTC on the Liquid sidechain to release an equivalent amount of BTC on the Bitcoin mainchain. Although only Liquid Federation members can perform a peg-out, there are many alternative ways to convert LBTC to BTC.
Warning: You should always ensure you have a means of converting LBTC to BTC before starting any peg-in process.