Author: Bixin Ventures

Introduction

As early holders and staunch supporters of BTC, Bixin Ventures has always been committed to the BTC ecosystem. We believe that BTC assets should play a greater role in excellent DeFi protocols across various chains and gain more returns. Therefore, an efficient cross-chain bridge is necessary, which is why we invested in DLC.link early last year.

With the rise of ordinal assets and the expansion of the Bitcoin data flow network, the applications of Bitcoin are increasing. Facing its limited native smart contract capabilities, Bixin Ventures sees DLC.Link as an innovative solution. After the FTX collapse, the market urgently needed secure, decentralized alternatives for Bitcoin. DLC.Link aligns with our vision, dedicated to building a secure, trustless ecosystem that promotes the application of Bitcoin in various scenarios.

Technical Analysis of DLC.Link

How DLC Technology Utilizes Schnorr Signatures in the Taproot Upgrade

Bitcoin introduced Schnorr signatures in the Taproot upgrade, which is a more secure alternative to ECDSA for creating and verifying keys. Schnorr signatures have linear properties, allowing for the efficient verification of multiple transactions at once by combining public keys and signatures[1]. Discreet Log Contracts (DLC) fully leverage the Schnorr and PTLC technologies already implemented in Taproot. Since these two technologies are already native features of the Bitcoin network, there is no need to rely on L2 or sidechains when using DLC. Instead, the DLC technology is protected by the computational power of the entire Bitcoin network, making it more secure and reliable.

In scenarios where DLC technology is used for lending, we typically use Schnorr signatures to handle conditional outcomes. In this process, both parties generate a unique key, combine it with their respective long-term keys to form a "public key," and prepare signatures for various potential outcomes in advance, such as repayment or settlement. Next, a decentralized network of witnesses confirms real-world outcomes through discreet log numbers, unlocking the pre-prepared signatures to trigger contract execution on the blockchain[2]. This demonstrates the universality, flexibility, and security of DLC technology in practical applications.

How DLC Technology Ensures On-Chain Bitcoin Security Without Validators

Discreet Log Contracts (DLC) no longer require external validators but directly inherit the security of Bitcoin, ensuring on-chain security[2]. In the DLC.Link architecture, the witness (Attestor) network is an innovative design. As off-chain service witnesses, they actively listen to the blockchain through smart contracts and publicly announce DLC events in JSON format. After obtaining corresponding results from data sources (smart contracts on another blockchain), witnesses prove and sign them. To enhance security, DLC.Link employs a 5-of-7 witness multi-signature, reducing the risk of collusion between witnesses and the contract party. The DLC.Link management contract randomly selects trustless witnesses from a whitelist[3]. The design also allows third parties to organize and run witness nodes, further promoting decentralization. The decentralized witness network avoids single points of failure and effectively facilitates the creation and signing requests of DLCs. This comprehensive design not only protects the integrity, security, and flexibility of Bitcoin transactions but also proves that DLC.Link is the ideal infrastructure for integrating BTC with decentralized finance (DeFi).

How FROST Signatures Advance the Security of DLC Technology

DLC.Link also integrates FROST (Flexible Round-Optimized Schnorr Threshold Signatures) to enhance security and simplify witness management. The key re-sharing feature of FROST grants dynamic management capabilities to the witness network, allowing for rapid adjustments of participants without compromising service integrity[4]. When setting up or changing witnesses, the system collaboratively generates keys. The entire process simultaneously creates a shared key and individual keys for each Attestor. This flexibility in key generation ensures that the witness network can be safely modified in the future without interrupting service.

When a blockchain event triggers the creation of a DLC contract, the coordinator among the witnesses broadcasts a create-dlc command, generating a consensus-supported DLC announcement. Similarly, when closing a DLC, a blockchain event prompts the coordinator to arrange for the creation of the final witness for the DLC, where each witness's signature ensures the security and verifiable conclusion of the contract. This advanced upgrade introduces the capability for dynamic adjustments to the witness network and significantly reduces computational complexity while maintaining strict security standards.

Figure 1. DLC.Link Technical Process

Product Introduction of DLC.Link

dlcBTC

dlcBTC will be launched in early 2024, standing at the forefront of decentralized finance (DeFi) by providing non-custodial Bitcoin on the Ethereum network through Discreet Log Contracts (DLCs). With dlcBTC, users can "self-wrap" deposits, with BTC locked by themselves and protected by a certifier's locking mechanism. dlcBTC depositors do not send BTC to DLC.Link or any third party.

In this groundbreaking process, users securely lock their Bitcoin into DLC.Link using DLCs, thereby creating an equivalent amount of dlcBTC. DLC acts as a digital safe on the Bitcoin blockchain, establishing pre-signed contracts between users and protocols. More securely, key distribution employs a 2-of-2 multi-signature UTXO mechanism, where one key is held by the user and the other is intelligently distributed within a trusted network of proving nodes.

Cross-chain bridges have a notorious reputation due to their many vulnerabilities. DLCs are a unique solution as they address the issue of cross-chain communication without the security concerns of bridging. Unlike bridged assets like wBTC, dlcBTC does not require intermediaries but opts to have the entire hash rate of the Bitcoin network protect the assets. dlcBTC v1 will be launched in the first quarter of 2024, introducing features such as whitelist access, stringent security measures, multifunctional trading pairs, and seamless integration with existing DeFi protocols, marking a significant advancement in the decentralized finance space[5].

We believe that after Bitcoin, the most decentralized network is Ethereum. Therefore, through dlcBTC, we are committed to bringing native BTC into the DeFi of the Ethereum network without building another small-scale, untested, and riskier L2 or solution. The minted dlcBTC tokens will be used as collateral on well-known DeFi platforms (such as Curve and AAVE), enabling users to actively participate in DeFi activities such as investing, lending, and hedging.

The Broad Application of DLC.Link in the Bitcoin Ecosystem

DLC.Link is a transformative force in the broader Bitcoin ecosystem, providing a range of applications through its Discreet Log Contracts (DLC). This innovation holds special significance for various parties, including credit trading desks, prime brokers, digital asset custodians, exchanges, and over-the-counter desks. This integration allows custodians to extend financial services to self-custodied Bitcoin clients, supporting custodial and conditional instant transfers of local Bitcoin, as well as providing lending services to miners and other self-custodied Bitcoin clients.

DLC.Link's role in decentralized finance (DeFi) is equally broad and influential. Its integration facilitates the development of loans and stablecoins based on on-chain Bitcoin assets, providing advantages for lending protocols. Additionally, DLC.Link can seamlessly scale to cross-chain protocols to enable the transfer of local Bitcoin between different blockchains. With the current popularity of BRC-20 assets, DLC.Link can also accommodate them into cross-chain bridging[6]. Furthermore, it supports the trading and lending of ordinal assets in NFT markets (such as OpenSea) and other smart contract-based platforms, bringing new use cases to DeFi.

Figure 2. Extensive Use Cases of DLC.Link

Conclusion

Bixin Ventures strategically invested in DLC.Link during the early seed round, hoping its seamless integration with decentralized finance (DeFi) would help address the challenges faced by the Bitcoin ecosystem. The DLC technology overcomes the limitations of Bitcoin's smart contracts, better leveraging Bitcoin's robust security to provide a safer solution. The recent Taproot upgrade with Schnorr Signatures has enabled DLC.Link to establish a witness network, while the integration of FROST further enhances the dynamic management of witnesses. The launch of dlcBTC also addresses the growing demand for secure, decentralized self-wrapping Bitcoin. Additionally, DLC.Link holds immense potential in various other product applications, including self-custodied deposits in CeFi and cross-chain ordinals in DeFi. Bixin Ventures' strategic investment in DLC.Link demonstrates our commitment to shaping decentralized finance (DeFi). We recognize the innovative contributions of DLC.Link in the crypto space and foresee its key role in providing Bitcoin liquidity to the entire broader crypto ecosystem.

References

[1] Namcios. Why You Should Care About Taproot, The Next Major Bitcoin Upgrade. Bitcoin Magazine. Retrieved from https://bitcoinmagazine.com/technical/short-bitcoin-taproot-explainer

[2] Dryja, T. Discreet Log Contracts. Retrieved from https://adiabat.github.io/dlc.pdf

[3] DLC.Link. How DLCs Secure Bitcoin On Chain without Validators. Retrieved from https://www.dlc.link/blog/how-dlcs-secure-bitcoin-on-chain-without-validators

[4] Komlo, C., & Goldberg, I. FROST: Flexible Round-Optimized Schnorr Threshold Signatures. Retrieved from https://eprint.iacr.org/2020/852.pdf

[5] DLC.Link. DLC.Link Introduces dlcBTC. Retrieved from https://www.dlc.link/blog/dlc-link-introduces-dlcbtc-a-game-changing-bitcoin-bridge-for-trustless-defi-operations

[6] DLC.Link. DLC.Link Docs Generic Use Cases. Retrieved from https://docs.dlc.link/applications/generic-use-cases