Author: Echo, NextAlpha

Introduction

With the Bitcoin market warming up in July, Bitcoin remains the largest and most widely used digital asset. However, as the application scenarios for Bitcoin smart contracts expand, the reliance on custodians due to Bitcoin's limited programmability has found better solutions.

In the past, in complex scenarios such as Bitcoin loans, it was necessary to first send Bitcoin to a third-party custodian, who temporarily acted as a "bank": locking the Bitcoin in their vault and issuing tokens or receipts that could be used for collateralized loans. This offset the decentralized advantage of Bitcoin and handed over all control of funds to the relevant custodians. To date, due to the misconduct of custodians or passive hacking attacks, losses have accumulated to over $100 billion.

Regarding the security issues of custody, the optimal solution is to build a self-custodial Bitcoin that can be used elsewhere. Discreet Log Contracts (DLC) have emerged.

Security of Discreet Log Contracts (DLC)

Discreet Log Contracts (DLC) were invented by Tadge Dryja, a 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 trusted intermediaries or third parties to execute the terms, DLC provides the external data needed for contract execution through digital signatures and oracles, while using advanced cryptographic techniques to ensure that the contract's conditions are met without the authorization of a centralized party.

When both parties in a transaction (such as Alice and Bob) sign a DLC, Alice, Bob, and a third-party Bitcoin oracle generate all potential outcome signatures. Alice and Bob can pre-sign directly in their wallets, while the third-party oracle can pre-sign without knowing the identities of both parties, but publicly release the data. The parties obtain oracle data and use it to complete the transaction.

Once the outcome is known, the Bitcoin oracle will prove the signatures are correct, enabling the parties to execute the transaction. This simple "if-then" logic is straightforward enough to maintain Bitcoin's decentralized and secure advantages while being powerful enough to support advanced financial activities such as loans. Throughout the transaction process, Bitcoin retains its native decentralized state without needing 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, with 100% of the transactions for transferring collateral protected by the underlying network of Bitcoin's mainnet nodes and miners. Funds locked into DLC actually exist as UTXOs directly on the Bitcoin ledger. This means that the control of collateral held through the DLC.Link platform is the same as controlling a regular Bitcoin balance in a Bitcoin wallet.

How to Mint dlcBTC in a Self-Custodial Manner?

dlcBTC is a more secure wrapped Bitcoin minted through self-custody, allowing Bitcoin to be used on EVM chains without relying on centralized custodians. However, unlike many digital assets available to retail users, the minting of dlcBTC is only available to approved merchants. This model is similar to BitGo's wBTC and Circle's USDC, ensuring higher security, compliance, and operational efficiency.

The minting process of dlcBTC can be seen as a "semi-decentralized" way of minting stablecoins using BTC. The minting party is also the holder. dlcBTC merchants (minting parties) mint or lock BTC themselves to mint dlcBTC. No other parties are involved. Merchants are well-equipped 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 also less concerned about decoupling issues: DLC.Link will officially endorse dlcBTC, and when decoupling issues arise, other merchants can redeem at a low price for arbitrage. However, dlcBTC cannot be freely redeemed by anyone; it can only be redeemed by the original Bitcoin holders who deposited the coins. The team has currently introduced the role of "merchant," allowing only "qualified retail" and large institutions to mint and burn 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 functionality that no other solution on the market currently offers.

How to Make dlcBTC Liquid?

DLC.Link has currently integrated with liquidity pools like Curve and Uniswap, and has gradually launched lending, trading, options, and other sections on its official website. dlcBTC serves as a window for self-custodial Bitcoin, enabling Bitcoin to participate in DeFi applications on Ethereum, providing users with a safer way to engage in Bitcoin DeFi.

1. Use dlcBTC for fast and secure transactions in liquidity pools while earning passive income from assets. Currently, dlcBTC holders can provide liquidity on both Uniswap and Curve to earn corresponding platform rewards.
2. Use dlcBTC to connect directly to various DeFi for investment. The platform is currently developing target option strategies for dlcBTC: for example, using dlcBTC to trade 0DTE options in Jasper Vault; using dlcBTC for customized option strategies in STS Digital.
3. Take out stablecoin loans on dlcBTC, leveraging the transparency of blockchain without increasing counterparty risk. Currently, DLC.Link supports lending on platforms like Ajna and Native. Users can deposit or stake dlcBTC to participate in the corresponding platform's DeFi ecosystem.

Conclusion

While the concept of earning yields from Bitcoin is not new, DLC.Link's innovative use of DLC technology makes it stand out in the market. Discreet Log Contracts (DLC) address many concerns that have historically hindered conservative Bitcoin investors from participating in yield-generating activities, potentially transforming the way Bitcoin holders interact with their assets.

As the cryptocurrency ecosystem continues to evolve, DLC.Link will play a crucial role in expanding the utility and financial opportunities for Bitcoin holders. By providing a method to earn yields that aligns with the core principles of Bitcoin's decentralization and security, DLC.Link will drive the widespread adoption and maturation of the Bitcoin economy.