Functionaries are specialized physical devices that operate and secure the Liquid Network. There are currently 15 functionaries, which are maintained by a subset of the Liquid Federation. Liquid's functionaries are geographically and geopolitically dispersed around the world. The functionaries are the "beating heart" of the Liquid Network; they provide members with connections to the network, produce blocks, and secure the Bitcoin two-way peg. How Do Functionaries Work? Each functionary consists of two key components: the functionary server and the server’s hardware security module (HSM). Functionary Server Unlike on the Bitcoin mainchain, which uses a proof-of-work algorithm to generate blocks, blocks on the Liquid sidechain are proposed and signed by the functionaries. In a round-robin, the 15 functionaries take turns proposing blocks. Once 11 of the 15 functionaries have validated and signed a block, it is added to the chain. The functionaries also manage the BTC to L-BTC two-way peg, verifying peg-ins and processing peg-outs. Hardware Security Module (HSM) Each functionary’s HSM secures the keys used to sign Liquid Network blocks as well as one of the 15 keys from the federation's multisig wallet. The HSM protects against chain reorganizations larger than one block. It accomplishes this by tracking the block height as well as the previous block hash of the last block it signed. There are only two conditions where the HSM will sign a block: If the previous block is the same, the block height must be equal. If the previous block is different, the block height must be higher than the previous height it signed. The HSM will never sign a block at a height less than the previous height it signed. Peg-out transactions are also validated and signed by the keys on the HSM. The HSM ensures certain conditions are met before signing off on peg-out transactions. For example, the HSM will only sign if the transaction outputs are going back to the federation or to a whitelisted address. Who Operates the Functionaries? Each functionary is operated by a single Liquid Federation member. Due to the current limitations of federated sidechain technology, there are, at present, a total of 15 functionaries. After the Dynamic Federations update—which is currently being phased in across the network—the maximum number of functionaries can be increased, improving the network's decentralization.