By: Echo, NextAlpha
Introduction
As the Bitcoin market rebounded in July, Bitcoin is still the largest and most widely used digital asset. However, with the development of Bitcoin smart contract application scenarios, the current dependence on custodians caused by Bitcoin's limited programmability has also found a better solution.
In complex scenarios such as Bitcoin loans in the past, Bitcoin must first be sent to a third-party custodian, who temporarily plays the role of a "bank": locking Bitcoin in their vaults and issuing tokens or receipts that can be used as collateral for borrowing. This offsets the decentralized advantages of Bitcoin and gives all control of funds to the relevant custodian. To date, more than $100 billion has been lost due to bad behavior by custodians or passive hacking attacks.
Regarding the security issues of custody, the optimal solution is to build a self-custodial Bitcoin that can be used elsewhere. Discreet Log Contract (DLC) came into being.
Security of Discreet Log Contract (DLC)
The Discreet Log Contract (DLC) was invented by Tadge Dryja, co-creator of the Lightning Network. DLC uses multi-signature conditions for Bitcoin payments. As a contract protocol, DLC allows for the creation of private, secure, and trust-minimized agreements/conditional payments directly on the Bitcoin blockchain. Unlike traditional contracts that typically require a trusted intermediary or third party to enforce the terms, DLC uses digital signatures and oracles to provide external data required for contract execution, as well as advanced cryptography to ensure that the conditions of the contract are met without the need for centralized party authorization.
When two parties (such as Alice and Bob) sign a DLC, Alice, Bob, and a third-party Bitcoin oracle generate all potential resulting signatures. Alice and Bob can pre-sign directly in their wallets, while a third-party oracle can pre-sign without knowing the identities of the two parties, but at the same time publish the data publicly. The two parties to the transaction obtain the oracle data and use it to complete the transaction.
Later, when the result is known, the Bitcoin oracle will prove that the signature is correct, allowing the parties to execute the transaction. This simple "if-then" logic is simple enough to maintain Bitcoin's decentralized and secure advantages, while being powerful enough to support advanced financial activities such as lending. Throughout the transaction process, Bitcoin remains in its native decentralized state without having to be transferred to any custodian or third party.
DLC.Link builds Bitcoin's underlying security
Since DLC.Link is built on Bitcoin, all applications, assets, and transactions inherit Bitcoin's underlying security, and transactions that transfer collateral are 100% protected by Bitcoin's underlying network of mainnet nodes and miners. Funds locked into DLC are actually UTXOs that exist directly on the Bitcoin ledger. This means that collateral held through the DLC.Link platform is controlled in the same way as regular Bitcoin balances are controlled in a Bitcoin wallet.
How to mint dlcBTC in self-custody?
dlcBTC is a more secure wrapped Bitcoin minted by self-custody, which enables Bitcoin to be used in the EVM chain without relying on a centralized custodian. However, unlike many digital assets available to retail investors, dlcBTC minting is only available to acceptors. This model is similar to BitGo's wBTC and Circle's USDC, and this approach ensures greater security, compliance, and operational efficiency.
The minting process of dlcBTC is seen as a "semi-decentralized" way to mint stablecoins using BTC. The minter is also the holder. The dlcBTC acceptor (minter) mints or locks up BTC to mint dlcBTC. No other parties are involved. The acceptor is well-positioned to handle complex regulatory requirements and comply with KYC and AML regulations, thereby streamlining operations and improving the overall efficiency of the dlcBTC minting process.
In this model, dlcBTC is not too concerned about the decoupling problem: DLC.Link will officially endorse dlcBTC, and when it encounters a decoupling problem, other acceptors can redeem it at a low price for arbitrage. However, dlcBTC is not freely redeemable by anyone. dlcBTC can only be redeemed by the Bitcoin holders who initially deposited the coin. The team has currently introduced the role of "acceptor", allowing only "qualified retail investors" and large institutions to mint and destroy dlcBTC.
Currently, dlcBTC can directly participate in the DeFi ecosystem like wBTC, such as Uniswap, AAVE, Curve, etc., while maintaining a security level close to the original BTC chain. This is a function that no other solution on the market can provide.
How to make dlcBTC liquid?
DLC.Link has been integrated with liquidity pools such as Curve and Uniswap, and has also launched lending, trading, options and other sections on its official website. As a self-custodial window for Bitcoin, dlcBTC enables Bitcoin to participate in DeFi applications on Ethereum, giving users a safer window to participate in Bitcoin DeFi.
Use dlcBTC in the liquidity pool for fast and secure transactions while earning passive income from assets. Currently, dlcBTC holders can provide liquidity on Uniswap and Curve to earn income on the corresponding platforms.
Use dlcBTC to directly connect to various types of DeFi for investment. The platform is currently developing targeted option strategies for dlcBTC: for example, using dlcBTC to trade 0DTE options in Jasper Vault; using dlcBTC to customize option strategies in STS Digital.
Stablecoin loans are made on dlcBTC, taking advantage of the transparency of blockchain without increasing counterparty risk. Currently, DLC.Link can support lending on platforms such as Ajna and Native. Users deposit or pledge dlcBTC to participate in the DeFi ecosystem of the corresponding platform.
Summarize
While the concept of earning yield from Bitcoin is not new, DLC.Link’s innovative use of DLC technology makes it stand out in the market. The Discreet Log Contract (DLC) addresses many of the concerns that have historically prevented conservative Bitcoin investors from participating in yield-generating activities, potentially revolutionizing the way Bitcoin holders interact with the asset.
As the cryptocurrency ecosystem continues to grow, DLC.Link will continue to play a vital role in expanding the utility and financial opportunities for Bitcoin holders. By providing a way to earn yield that is consistent with Bitcoin's core principles of decentralization and security, DLC.Link will drive widespread adoption and maturity of the Bitcoin economy.
