A virtual machine (VM) has been serving as a crucial component in cloud computing with its rich set of convenient features. The high overhead of a VM has been well addressed by hardware support such as Intel virtualization technology (VT), and by improvement in recent hypervisor implementation such as Xen, KVM, etc. However, the high demand on VM image storage remains a challenging problem. Existing systems have made efforts to reduce VM image storage consumption by means of deduplication within a storage area network (SAN) cluster. Nevertheless, an SAN cannot satisfy the increasing demand of large-scale VM hosting for cloud computing because of its cost limitation. In this paper, we propose Liquid, a scalable deduplication file system that has been particularly designed for large-scale VM deployment. Its design provides fast VM deployment with peer-to-peer (P2P) data transfer and low storage consumption by means of deduplication on VM images. It also provides a comprehensive set of storage features including instant cloning for VM images, on-demand fetching through a network, and caching with local disks by copy-on-read techniques. Experiments show that Liquid’s features perform well and introduce minor performance overhead.