Mar 20, 2023
Introduction
Bitcoin is widely known as a decentralized digital currency that is not controlled by any central authority. However, it can do more than just transfer value between users. The Bitcoin network has a robust (and underexplored) platform for smart contracts, which enable trustless and automated interactions between parties without intermediaries. One such type of smart contract is called a Discreet Log Contract (DLC), which allows users to create secure and private derivatives contracts that settle on the Bitcoin blockchain.
In this blog post, we will explore what DLCs are, how they work, and how Liquidium leverages DLCs to make Ordinal lending possible on the Bitcoin network.
What are Discreet Log Contracts (DLCs)?
At a high level, Discreet Log Contracts (DLCs) are a type of smart contract that allows parties to create agreements on the Bitcoin network. These contracts can be used for a variety of purposes, including betting on future events, creating lending contracts, managing risk with options contracts and swaps, insurance and credit default swaps, and so much more. DLCs use digital signatures and hash functions to create a secure and private agreement between the parties involved. The use of DLCs offers a significant advantage to Bitcoin users, as it offers a decentralized and trustless way to build and engage with financial instruments.
How do Discreet Log Contracts work?
DLCs work by using a combination of digital signatures, hash functions, and oracles to create trustless and secure contracts that settle on the Bitcoin blockchain. Here is how it works:
Contract creation: The two parties, the buyer and the seller, create a contract by exchanging public keys corresponding to a certain amount of Bitcoin. They also agree on the terms of the contract, such as the duration of the contract and the settlement price.
Oracle selection: The parties select an oracle, a third-party that provides data about the outcome of the contract. The oracle can be a trusted party, such as a reputable data provider, or a decentralized oracle, such as an incentivized network of users.
Contract execution: When the settlement time arrives, the oracle signs a message that reveals the outcome of the contract, such as the price of an asset. The parties use this message to generate a private key, which unlocks the contract's Bitcoin funds and distributes them according to the terms of the contract.
How Liquidium uses DLCs for Bitcoin-based Ordinal Lending
Liquidium is a groundbreaking solution for Ordinal lending on Bitcoin that leverages the power of Discreet Log Contracts (DLCs) and Partially Signed Bitcoin Transactions (PSBTs). By partnering with our trusted oracle provider DeepLake, we are bringing Ordinal lending to life! Here is how it works:
Contract creation: The borrower and the lender create a contract by exchanging public keys corresponding to a certain amount of Bitcoin and the Ordinal collateral. They also agree on the loan terms and set them in the contract, such as the loan amount, the interest rate, and the duration.
Oracle selection: The parties select an oracle, which provides data about the price of Bitcoin and the Ordinal collateral. The oracle can be a trusted party, such as a reputable data provider, or a decentralized oracle, such as an incentivized network of users.
Contract execution: When the loan term ends, the oracle signs a message that reveals the price of Bitcoin and the Ordinal collateral. The parties use this message to generate a private key, which unlocks the collateral and distributes the loan amount and interest
Conclusion
Discreet Log Contracts are a powerful tool for creating secure and private derivative contracts on the Bitcoin network. Liquidium leverages the power of DLCs to make Ordinal lending possible on Bitcoin, providing borrowers with quick and easy liquidity access while retaining full control over their assets. With Liquidium, borrowers can use their Ordinals as collateral to borrow Bitcoin without intermediaries or custodians, and lenders can earn interest by supplying liquidity to the Ordinal lending market.
