Sidechains: Liquid and Rootstock

Wonder

1. What happens when the security of a new chain depends on the honesty of fifteen institutions?
2. How can a sidechain offer features like hidden amounts without breaking the hard cap of Bitcoin’s supply?
3. Why did Rootstock choose to merge-mine with Bitcoin while Liquid relies entirely on a federation?

Explore

1. In 2014, Adam Back and co-authors including Gregory Maxwell and Pieter Wuille published ‘Enabling Blockchain Innovations with Pegged Sidechains.’ The paper outlined a mechanism for connecting parallel blockchains to Bitcoin via a two-way peg. This structure allows independent consensus rules while maintaining value parity with the main chain. Unlike rollups that settle data on Layer 1, sidechains maintain separate state. The trade-off is clear: flexibility in development comes at the cost of absolute decentralization.
2. Liquid Network launched in October 2018 under Blockstream’s stewardship. It uses L-BTC, an asset pegged one-to-one with bitcoin. Liquid produces a block every minute, and transactions are treated as final after two blocks. Crucially, it implements Confidential Transactions, which hide transaction amounts from observers while still allowing verification of balance integrity. This privacy feature is unavailable on the main chain due to its transparent ledger design.
3. The Liquid Federation controls the peg through an 11-of-15 multisig wallet. Member institutions run ‘functionaries’ that produce one-minute blocks. If eleven of them colluded they could take the locked bitcoin, and Blockstream holds emergency backup keys that can spend after a long timelock. The risk is not only collusion: in September 2026 a software bug let an attacker create unbacked L-BTC and redeem it through the federation’s normal signing, draining most of the peg’s reserves before peg-outs were paused. Users accept these risks in exchange for speed and privacy. This represents a significant departure from Bitcoin’s permissionless model, where no single group controls key management.
4. Rootstock (RSK), launched in January 2018, takes a different approach to smart contracts. It is EVM-compatible, allowing developers to use Solidity code familiar from Ethereum. Unlike Liquid, RSK merge-mines with Bitcoin, meaning Bitcoin miners can secure it at the same time by committing to Rootstock blocks in their own coinbase transactions. This ties RSK’s security more directly to Bitcoin’s hashrate, though its peg remains controlled by a federation using hardware security modules.
5. The token circulating on Rootstock is RBTC. Peg-ins and peg-outs are controlled by a federation of signers (the PowPeg) whose keys sit in hardware security modules. This setup provides a degree of decentralization through key distribution, but it still relies on trusted entities to release funds. In contrast, Liquid’s asset issuance supports stablecoins like Tether (USDT), enabling instant settlement of fiat-backed assets alongside L-BTC.
6. Both networks illustrate the central tension in building beyond Bitcoin’s base layer: functionality versus trust. By delegating custody and consensus to specific groups or mechanisms, sidechains achieve features that the base layer intentionally excludes. The choice between Liquid’s confidential transactions and Rootstock’s smart contract compatibility depends on whether privacy or programmability is the primary requirement. Neither solution eliminates the need for external verification of the peg.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Back et al., 'Enabling Blockchain Innovations with Pegged Sidechains' (2014)
• Blockstream Liquid Documentation
• Rootstock Documentation
• Bitcoin Optech, 'Sidechains' topic page