Key Points

• DLC.Link and Babylon are pioneering projects that connect Bitcoin with the DeFi ecosystem through a unique interoperability mechanism.

• DLC.Link uses Discreet Log Contracts (DLCs) to ensure secure, self-custodied Bitcoin transactions, emphasizing user autonomy and anti-theft operations.

• DLC.Link prioritizes decentralization and anti-theft asset management, while Babylon's pooled staking model provides BTC staking on PoS networks but has poorer control and security.

• DLC.Link leverages Bitcoin's computational power to secure transactions and lock assets, preserving the principles of self-custody and decentralization for BTC holders exploring DeFi.

According to Glassnode, as the idle supply of Bitcoin (BTC) skyrockets to an unprecedented 70.35%, the allure of yield generation opportunities in DeFi is compelling. However, the path to realizing these yields is fraught with risks from third-party custodians and centralized cross-chain bridge mechanisms—many in the Bitcoin community are skeptical of these options. In this context, DLC.Link and Babylon emerge as beacons of innovation, redefining the narrative of Bitcoin's integration into DeFi. Both projects uphold the core spirit of Bitcoin, albeit with different strategies.

DLC.Link harnesses the powerful capabilities of Discreet Log Contracts (DLCs) to enable BTC merchants to lock BTC into a DLC vault (a special multi-signature wallet) for DeFi yield activities. On the other hand, Babylon locks BTC in OP codes to bridge BTC to Proof of Stake (PoS) chains using a different approach, achieving "almost trustless" staking and providing fully slashed security for PoS chains.

The unique contributions of safely utilizing BTC in the DeFi space lay the foundation.

What is Babylon? How does it work?

Babylon is a Layer 1 (L1) chain designed with a Bitcoin scaling protocol to protect a decentralized world. To achieve this, Babylon leverages Hash Time-Locked Contracts (HTLC) and three main aspects of Bitcoin: BTC as the asset; Bitcoin as the PoW-protected timestamp server; and the Bitcoin blockchain as the most censorship-resistant block space in the world. Babylon introduces three key protocols to leverage these advantages: the Bitcoin Staking Protocol, the Bitcoin Timestamp Protocol, and the Bitcoin Data Availability Protocol, with the staking protocol being the core.

The Bitcoin Staking Protocol enables Bitcoin holders to stake directly on a Proof of Stake (PoS) blockchain without relying on third-party services. It provides slashing economic security for PoS chains while ensuring efficient staking unbinding to enhance the liquidity of BTC holders. This modular protocol integrates seamlessly with various PoS systems, laying the groundwork for future staking innovations.

Given Bitcoin's lack of native smart contract functionality, Babylon's staking mechanism utilizes UTXO transactions written in Bitcoin's programming language. These transactions are designed to execute specific spending rules, mimicking the functionality of Bitcoin contracts. Since the Bitcoin blockchain does not yet support contracts, the Babylon staking protocol uses "almost trustless" contract simulations to lock BTC.

How Babylon's Staking Protocol Locks BTC

From the perspective of BTC stakers, the Babylon Bitcoin Staking Protocol works as follows:

1. Staking BTC

Stakers initiate the process by sending a staking transaction to the Bitcoin chain, locking their tokens in a self-custodied vault. More specifically, it creates an unspent transaction output (UTXO) with two spending conditions:

• A time lock, allowing the staker to withdraw using their key.

• A unique Extractable One-Time Signature (EOTS) that burns this UTXO.

1. Validation on PoS Chain

Once the staking transaction is confirmed on the Bitcoin chain, the staker (or a validator delegated by the staker) can begin validating the PoS chain and use the EOTS key to sign valid blocks.

What is DLC.Link and How Does It Work?

DLC.Link is an innovative protocol that utilizes DLCs to achieve secure integration of Bitcoin with DeFi. Initially proposed by Tadge Dryja in 2018, who is a co-inventor of the Lightning Network, he suggested that DLCs could enable new decentralized financial applications while ensuring self-custody of Bitcoin deposits.

DLCs allow parties to make conditional payments based on predefined conditions. The parties determine possible outcomes, sign in advance, and execute payments using these pre-signed agreements when the outcome is known. By providing decentralized security directly on-chain, DLCs also ensure the security of the entire computational power of the Bitcoin network.

At the core of DLC.Link is the provision of dlcBTC, a novel solution that allows Bitcoin holders to lock their assets in a DLC vault, minting ERC20-compatible tokens for use in DeFi applications. Unlike traditional wrapped Bitcoin solutions that compromise on self-custody and decentralization principles, dlcBTC ensures that BTC holders can participate in DeFi yield-generating activities without relinquishing control over their assets.

The dlcBTC payment address is predetermined and locked during the deposit phase. This means that if a security breach occurs, attackers cannot redirect or deplete BTC deposits, making dlcBTC a "theft-proof" Bitcoin scalability solution. Additionally, this innovative model uses the full Bitcoin hash rate to protect BTC deposits, ensuring that dlcBTC benefits from the foundational security of Bitcoin.

How DLC.Link Locks BTC On-Chain

DLC.Link allows merchants to self-lock BTC in a DLC vault to mint dlcBTC for DeFi yield-generating activities. The process of locking BTC on-chain using DLC.Link is meticulous and straightforward:

• Locking and Minting: Merchants create time-locked transactions to protect their Bitcoin, which are then locked by DLC oracles. These oracles generate key transactions and announcements to ensure transparency and trust, coordinating with smart contracts on Arbitrum to mint dlcBTC tokens.

• Claiming and Converting: Merchants claim their dlcBTC tokens through keys and atomic swaps. The oracles then authorize the transfer of dlcBTC to the vault, converting the prepayment transaction into a standard transaction.

• Redeeming and Releasing: Users can redeem dlcBTC back to BTC, with the oracles publishing proofs and unlocking the DLC. Merchants complete this process by signing an agreement to transfer BTC from the DLC vault back to their wallet, ensuring the security of minting and redemption.

Through these steps, DLC.Link not only ensures the secure integration of Bitcoin with DeFi but also adheres to the principles of decentralization and self-custody, enabling users to leverage Bitcoin for yield-generating activities without compromising security.

Key Differences Between DLC.Link and Babylon BTC Locking

The differences between DLC.Link and Babylon lie in their approaches to integrating BTC with DeFi while upholding Bitcoin's inherent principles of decentralization, security, and sovereignty. Both initiatives aim to facilitate the use of BTC in the DeFi ecosystem but employ different mechanisms to achieve this goal.

• Structural Design: DLC.Link utilizes DLCs to achieve secure, decentralized use of BTC in DeFi, while Babylon simulates Bitcoin's unique properties, focusing on direct BTC staking on PoS chains through its staking protocol.

• Utility Focus: DLC.Link is dedicated to making BTC composable through various DeFi yield-generating activities such as lending, liquidity mining, DeFi options, and derivatives trading. In contrast, Babylon primarily focuses on ensuring decentralized economics by staking BTC on Cosmos and other smaller chains.

• Security Model: DLC.Link operates as a protocol on the Bitcoin network, leveraging the full computational power of Bitcoin to secure transactions. On the other hand, Babylon operates as a Bitcoin L1 chain, with its security based on economic incentives and penalties within its staking protocol. Its slashing mechanism presents greater security vulnerabilities.

• Self-Sovereignty: DLC.Link retains user self-sovereignty, as the system cannot access locked BTC deposits for slashing or censorship, whereas Babylon carries the risk of slashing user deposits, meaning it can censor deposits by leaking depositors' private keys.

• Anti-Theft Mechanism: DLC.Link employs a pre-signed mechanism when minting dlcBTC, ensuring that the DLC vault always pays only to the original depositor's address. In contrast, Babylon lacks a pre-signed mechanism, increasing the risk of fund redistribution during security breaches.

• Collateral Management: DLC.Link allows BTC to be self-encapsulated, distributing collateral across multiple accounts throughout the network. Conversely, Babylon claims to enable self-locking of BTC but, in reality, centralizes collateral to support PoS staking.

Conclusion

Both DLC.Link and Babylon offer innovative solutions for using BTC in the DeFi space, but DLC.Link stands out as a more versatile and secure choice. By harnessing the powerful capabilities of DLCs, DLC.Link not only ensures decentralized and anti-theft integration of BTC with various DeFi applications but also retains the paramount principles of sovereignty and decentralization.

Its unique collateral management approach and robust security model, combined with the full computational power of the Bitcoin network, provide unparalleled protection and flexibility for BTC holders looking to venture into DeFi. DLC.Link focuses on enhancing the composability and utility of BTC without compromising security, making it an excellent solution for those seeking to safely and effectively unlock the potential of their BTC assets in the DeFi realm.