Understand how dlcBTC transparently and securely enables the use of Bitcoin in DeFi, with every step fully visible on the blockchain.
dlcBTC is a more secure wrapper for Bitcoin, providing a theft-resistant bridge for DeFi, allowing users to engage in yield activities such as staking, lending, and trading.
Unlike traditional custodial services, dlcBTC utilizes Discreet Log Contracts (DLCs), allowing acceptors (institutions with more than 15 Bitcoins) to uniquely multi-sign their held assets, ensuring they retain control of their assets throughout the process.
This institution-friendly approach reduces risks associated with centralized custody, such as fraud and government seizure.
This article aims to provide a detailed overview of the transparent, auditable process of minting dlcBTC, from locking Bitcoin into multi-signature DLCs to final minting on blockchain networks like Ethereum and Arbitrum.
We will break down each step, highlighting key participants such as the DLC validators, and demonstrate the security and transparency of the entire process.
Analysis of dlcBTC Transactions
The minting process of dlcBTC involves several key steps, each designed to maintain transparency, security, and complete auditability on-chain.
Minting Process
Step 1
The acceptor first creates a vault object on the target chain and mints wrapped Bitcoin dlcBTC within that vault.
Minting can occur on Ethereum, Arbitrum, Base, OP, or other supported chains. They are assigned a unique ID (UUID) for this Vault.
Step 2
A Bitcoin PSBT (Partially Signed Bitcoin Transaction) is randomly generated and used to deposit funds into the self-custodied dlcBTC network.
Bitcoin will be locked in a 2-of-2 multi-signature between the acceptor and the decentralized Attestor network of dlcBTC, and submitted to the UUID from Step 1.
This pre-signing mechanism ensures that the locked BTC will always return to the original depositor (even in the system), thus providing dlcBTC with theft-resistant features.
Once the user signs the agreement, they send it to the Attestor network.
Step 3
Validators independently verify transactions, ensuring everything is correct and validating the amounts.
If everything is correct, and this vault is brand new or currently empty (not holding any BTC collateral), then the validator will broadcast the transaction.
Assuming this Vault already has some Bitcoin collateral. In this case, the validators will perform the threshold signing process using the FROST system to sign their side of the multi-signature, spending from the old DLC transaction and entering the new transaction, combining the old value with the new deposits from users.
Then, this new transaction will be broadcasted. Thus, at any time, each Bitcoin transaction represents a Vault.
Step 4
Once the validator network confirms sufficient Bitcoin confirmations in the transaction, they will execute the threshold signing process again for the target chain.
Redemption Process
Step 1
The process is similar when the acceptor needs to exchange dlcBTC for Bitcoin.
The acceptor first interacts with the target chain, burning the amount of dlcBTC tokens they wish to exchange for Bitcoin.
Step 2
Then, the acceptor signs another PSBT to send some or all of the Bitcoin from the vault transaction back to their wallet, while the remaining Bitcoin will initiate a new transaction back to the vault. This PSBT is sent to the validator.
Step 3
Validators independently verify transactions, and if everything looks correct, they will use the FROST threshold signing to sign one side of the 2-of-2 transaction and then broadcast the transaction.
Subsequently, the Bitcoin will reappear in the acceptor's wallet.
dlcBTC Minting Example (On-chain Query)
Bitcoin funding transaction showing Bitcoin locked in multi-signature DLC: View Transaction
Multi-signature DLC address itself: View Multi-signature Address
Examples of Partially Signed Bitcoin Transactions (PSBT)
PSBT is a key component of this process, clearly outlining each step involved in the transaction.
For example, when the acceptor initiates the Bitcoin locking process, they generate a PSBT that records the conditions under which the Bitcoin is released.
This transparency makes it easy to verify the transaction conditions.
Fee Structure
Minting dlcBTC requires a fee of 12 basis points (0.12%).
Burning dlcBTC to redeem Bitcoin requires a fee of 15 basis points (0.15%).
These fees are also visible on-chain, providing complete transparency of the associated costs of using the service.
Minting/Burning is Transparent
A key value proposition of dlcBTC is that every step of the minting/burning process is visible and can be audited on-chain. This ensures complete transparency—no hidden processes or behind-the-scenes 'magic.'
Bitcoin holders can track their assets from the moment they lock them into a multi-signature DLC until they receive dlcBTC tokens on another blockchain.
The process of locking Bitcoin into the DLC can be verified through the Bitcoin blockchain, allowing anyone to trace the funds.
Integrating Chainlink's Proof of Reserves (PoR) further enhances the transparency and auditability of dlcBTC by providing real-time verification of Bitcoin reserves.
Chainlink's decentralized oracle network continuously monitors and reports the status of Bitcoin locked in the DLC, ensuring the amount of Bitcoin supporting dlcBTC is always verifiable and accurate.
This additional layer of security means users can confidently trust that their dlcBTC is completely secure, with all reserve data independently verified and visible on-chain, reinforcing dlcBTC's commitment to complete transparency and eliminating the risk of under-reservation.
Conclusion
In summary, dlcBTC provides institutions and acceptors with a secure, transparent, and fully auditable way to mint wrapped Bitcoin without the risks associated with custodial services.
Using multi-signature DLCs ensures that the acceptor retains control over their Bitcoin while participating in DeFi.
Because the entire process is visible on-chain and validated by decentralized DLC validators, dlcBTC becomes a secure and efficient alternative to traditional wrapped Bitcoin services.
