By default, all Liquid transactions use Confidential Transactions, a cryptographic protocol that hides both the type of assets and amounts that are transacted to any third parties monitoring the Liquid blockchain.
Confidential Transactions achieve this while ensuring that other Liquid users can verify the accuracy of the transaction amount, the involved wallet balances, and the total supply of the asset involved in the transaction.
As a result, the majority of transactions on the Liquid blockchain look very similar, as seen on Blockstream’s Liquid Explorer.
What Data Is Still Visible on Liquid?
While Confidential Transactions hide certain details of a transaction on Liquid, they don’t hide everything. Like on the Bitcoin blockchain, all transactions can be viewed via their transaction ID. The addresses of senders and receivers further remain visible as well and can be retraced like on the Bitcoin blockchain. The fees paid for a transaction are also publicly viewable.
Who Can See Transaction Data?
Only the parties involved in a transaction, as well as users with the blinding key of a transaction, can see the asset type and amount transacted. Nobody else is able to see those details. Not even Liquid members or functionaries are able to break the cryptography of Liquid’s Confidential Transactions.
Revealing Transaction Data
While certain transaction details are hidden from third parties, either user participating in a transaction has the option to share a blinding key with one or more third parties. Any third party with access to a user’s blinding key is able to see the details of all incoming and outgoing transactions to that user’s Liquid address.
As a result, Liquid users can transact confidentially, while maintaining the ability to share details of their transaction with third parties, for example an auditor or regulator.
Is Confidentiality Even That Important?
Normally, all transaction data on a blockchain is publicly visible. Such data includes the sending and receiving addresses used, the type of asset transacted, the amount of funds that are transacted, as well as a complete transaction history. This has major implications for the financial confidentiality of users:
- Users risk revealing sensitive financial data to counterparties, competitors, and criminals.
- Users risk getting front-ran when making large transactions to exchanges (see Whale Alerts).
The Liquid sidechain is designed to resolve these issues by ensuring the confidentiality of a transaction between two parties while maintaining a network that is open to and verifiable by all users.