LIQUID-A Scalable Deduplication File System For Virtual Machine Images. INTRODUCTION:Cloud computing means storing and accessing data programs over internet instead of yours computers hard drive. A virtual machine is a software that creates a virtualized environment between the computer platform and the end user in which the end user can operate software. Data Deduplication – data compression technology. Eliminate duplicate copies of repeating data. A redundant data block is replaced instead of storing multiple times.Improves storage utilization. ADVANTAGES OF LIQUID: *Fast virtual machine deployment with peer to peer data transfer. *Low storage consumption by means of deduplication. *Instant cloning for virtual machine images. *On demand fetching through a network caching with local disks. *LIQUID files has no specific limit. CONCLUSION: Presented LIQUID which is a deduplication file system with good IO performance. Achieve by caching frequently accessed data blocks in memory cache. Avoids additional disk operations. Deduplication of VM images proved to be effective.