Tether on Liquid for improved privacy compared to Ethereum

On January 7th, Tether made a 15 million USDT cross-chain swap from Ethereum to Liquid, a federated Bitcoin sidechain developed by Blockstream. It seems that the demand for more privacy is the driver of this move.

Although support for USDT on Liquid was first announced in July 2019, according to CTO Paolo Ardoino, the decision to finally convert some USDT to Liquid was driven by customer demand.

https://twitter.com/paoloardoino/status/1215035493127262209?s=20

Centralized stablecoins in search of protocols they can propagate on

The Ethereum blockchain has been chosen for its lower cost, higher speed and more user-friendly wallets. 

Previously USDT tokens were hosted by Omni, a Bitcoin-based project, but in 2019 they migrated to the ERC20 standard to improve efficiency.

Subsequently, TRON also obtained part of the total liquidity of this stablecoin, but Ethereum still holds the majority of the assets on the chain despite the experimentation on Liquid.

Which customers will benefit from Liquid’s privacy?

The characteristics of public blockchains make data analysis easier. Through APIs, many online services report movements from the richest addresses, which are called “whales”.

Whale Alert is one of them. Staying up to date on the entry or exit movements of Tether dollars is a godsend for traders looking for signals from the market.

Ethereum now hosts most of the existing USDT. However, the increased privacy offered by Liquid through confidential transactions offers a compelling reason for switching technology.

Liquid’s federates do not know the amounts and assets of confidential transactions (CTs) and only verify that output and input “sum to zero”.

The details of the transaction are known only to the sender and receiver who may decide to disclose them to third parties for auditing purposes.

Blockstream’s Liquid sidechain has had a slow start since it was launched in October 2018. However, the private USDT transaction addresses a major downside for traders who will now be able to move assets in a more confidential manner. 

While initially it was enough to trust Tether and its reserves, now the sidechain federates also have a role, which is usually played by the miners in the proof of work and the stakers in the proof of stake.

Are we going to see a migration?

The pressure that Paolo Ardoino’s clients are receiving could only be the beginning of a mass migration.

In a context of rival and antagonistic communities, there may be two reasons for this pressure:

• Not to promote transactions on Ethereum for the community that buys and sells BTC against USDT and does not like the rival.

• Less traceability of that small part of hodlers who hold large amounts of cryptocurrencies and want to operate without giving an advantage to the market before making a real trade.

Hence, the picture could be the following: the movements of small fish are tracked and can be analyzed thanks to the services that monitor cryptocurrencies held in Ethereum-like wallets, while some large market-makers will act undisturbed. 

Sidechain versus blockchain

There are now 15 federates on Liquid, 6 would be enough to censor a UTXO. Certainly, the desire is to increase decentralization in the future and therefore the number of federates by strengthening the network. It almost seems like talking about a blockchain within a blockchain.

There will probably be different degrees of decentralization for different purposes, this is certainly the policy of Blockstream.

For the moment Bitcoin and Ethereum’s pseudo-anonymity isn’t appreciated by the big whales, and Liquid’s sidechain seems a better solution for their operations.