Circumventing Stablecoin Sanctions with Liquid.
(Corrections and additions welcome. Artisan hand-made by a real human, not AI slop.)
Scenario 1:
1. Party X receives payment in Bitcoin.
2. Assume X is freely able to broadcast a BTC tx on-chain, to a Liquid Federation peg-in address for L-BTC.
3. The Liquid Federation controls the multisig, issuance of L-BTC, and can enforce policy. In practice, this means that peg-ins can be refused, delayed, or flagged. Technically, the peg is designed to be deterministic, but functionaries are known entities and they operate in regulated jurisdictions so there *could* be legal pressure risk.
4. Assume Liquid issues X the L-BTC. L-BTC is free to move to other L-BTC addresses confidentially.
5. They want to swap L-BTC for L-USDT p2p. LP’s may refuse to quote you, but the swap can’t be stopped.
6. They want to swap L-BTC for L-USDT using an OTC/LP like Sideswap. The incoming L-BTC would be *very difficult*, but not impossible, at the protocol level to identify because of Liquid’s confidential transactions. In practice, these entities may require RFQ-style interaction (quote requests), see your network connection, behavior, and/or require API keys, accounts, or relationships. Real world detection and liquidity *could* reveal where it might be coming from and then Sideswap faces a choice similar to the Liquid Federation at Step 1.3.
7. Assume Sideswap swaps the L-BTC for L-USDT.
8. That L-USDT is free to move to other L-USDT addresses confidentially.
Scenario 2:
1. Party X wants to receive payment in L-USDT.
2. X receives payment in self custody L-USDT, nothing can stop that.
3. X sends L-USDT to other L-USDT address, nothing can stop that.
4. X sends L-USDT to swap for L-BTC through Sideswap, similar to Scenario 1.6.
5. X swaps L-USDT for L-BTC p2p, same as Scenario 1.5.
6. X swaps L-BTC for BTC, similar to 1.3, but is better because L-BTC has extreme privacy relative to BTC. It would have to be somehow flagged (unlikely) by the federation to stop the peg-out.
The biggest chokepoints are:
1. Redemption of USDT from Tether itself. Made irrelevant if you stay within Liquid. If X had L-USDT, Tether would not be able to directly identify which funds were theirs. They’d basically have to shut down all issuance on Liquid. Recent episode of @npub10atn...02w3 they talk about this directly, from 14:30-21:00. 
2. Liquid peg in.
3. OTC/LP’s like Sideswap.
4. Liquidity. Currently there’s ~$300M in L-BTC and ~$100M in L-USDT, which places liquidity and privacy constraints on swaps.
Fountain: Podcasts & Music
Citadel Dispatch • CD194: SIDESWAP - LIQUID PREDICTION MARKETS • Listen on Fountain
Scott, cofounder of SideSwap, joins the show to talk about what his team has been quietly building in the Liquid ecosystem. We cover SideSwap's ato...
