DLC, or Discrete Log Contract, is a Bitcoin smart contract that uses oracles to make trustless transactions. They were introduced in 2017 as a theoretical idea and have been on the Bitcoin network since 2020. DLC functionality substantially improved in 2021 when the network activated its Taproot upgrade. To determine the outcome of any bet, DLC imports off-chain data from an oracle that provides information to the Bitcoin network and acts as a source of information about the real world for smart contracts. After the outcome is provided and settled, the funds are redistributed based on the initial agreement between the parties involved.
Bitcoin Discrete Log Contracts are well executed on Lightning Network, offering users benefits like faster settlement rates and low transaction costs. Discrete Log Contracts can be considered a smart contract for the Bitcoin network. Fundamentally, the DLC technology allows peer-to-peer betting on the Bitcoin network. These are a helpful alternative to the centralized sports betting platforms on which intermediaries oversee the bets and hold custody of funds of both parties.
Discrete Log Contracts (DLC): The Gateway to Powerful Smart Contracts for Bitcoin
Discrete Log Contracts are developed to link the Bitcoin network to the world beyond blockchain. A DLC creates communication bridges to bring real-world information to the Bitcoin blockchain network. Once the information reaches there, it is processed by smart contracts within the blockchain. Oracles are quite common on Ethereum since they can bring real-world information to decentralized applications (dApps) or DeFi (decentralized finance) protocols based on Ethereum and require data. For that, Chainlink is the best Oracle project on Ethereum.
However, with Bitcoin and other popular digital currencies, the story is quite different, assuming that Bitcoin script is quite limited in terms of functions, and this function type is nearly impossible for anyone to implement on the network. However, developing an entire second-layer protocol similar to Blockstack or RSK is necessary to add such functionalities.
How do Discrete Log Contracts Work?
To understand how discrete log contracts work, one needs to understand three main events when people want to bet on an outcome of the real world for the future.
Funding Transactions – Both parties can develop and broadcast funding transactions that lock up funds, to be eventually paid out based on the outcome of the contract. Initiating DLCs requires both parties to send Bitcoin to a multi-signature shared wallet. The deposits then serve as funds that both parties can wager. The transactions can then be signed using private keys and be submitted on Bitcoin for further confirmation.
CET or Contract Execution Transactions – The parties must agree to all the DLC terms and conditions, including attributes such as initial funding, potential payouts, and data source. The parties will sign two more transactions called CET or contract execution transactions that represent all possible outcomes for the future. When a contract execution occurs, the oracles broadcast relevant signatures that correspond to the outcome. Each party can now generate a transaction by integrating this signature with their incomplete transactions created earlier.
Settlement – Once the oracles determine the outcome, they release the signature for CETs representing the winning bet. CETs for losing bets are subsequently dismissed. The oracles provide the winning bet CET’s final signature, allowing the winning party to execute the contracts and claim their funds. During this process, the contract’s information never gets revealed on-chain and hence, remains private at all times. In addition to this, the oracle does not know the particular contract that uses its data. This provides an added layer of privacy and security to the contracts.
Essential Use Cases of Discrete Log Contract
DLC has great potential to unlock the strengths of the Bitcoin Blockchain networks and position them as a top-notch Web3 platform. Some of the prominent use cases for Discrete log contracts are –
Decentralized Finance (DeFi)
DLCs import cross-chain data and allow parties to use smart contracts to wager on an asset’s future value. DLC allows the execution and development of smart contracts representing underlying assets of any quantity, for instance, futures contracts on Bitcoin’s price. This is true as long as trustworthy and secure price feed oracles are available. DLCs can establish the most thriving blockchain ecosystem for futures contracts on Bitcoin.
Insurance
DLCs essentially facilitate a trust-minimized system to address information parity. To put it in simple language, Discrete Log Contracts offer a framework that needs the minimum trust and reliability to operate. This may resolve the information parity issue prevalent in the insurance sector. The oracle-based solution can therefore, drive the next-gen businesses for the biggest providers of the insurance industry.
Sports betting
Lastly, discrete log contracts have an excellent potential to modernize peer-to-peer (P2P) betting on Bitcoin Blockchain. With P2P bets, the best Bitcoin sports betting sites can be empowered by DLCs, allowing players to participate in a private and secure sports betting activity that eliminates all intermediaries.
Current Status of Discrete Log Contracts (DLC) & its Future Potential
Given all the features and benefits of Discrete Log Contracts, it is unfortunate that the technology is still developing. DLC’s first theoretical implementation was officially presented only in January 2020. Users can review the implementation on Github and get an idea of the future potential of DLC.
Many people are interested in taking the work of DLCs forward, which will allow digital currencies like Bitcoin to grow their capabilities most unpredictably. For instance, it would enable users to run decentralized finance apps or decentralized applications directly on Bitcoin. While this is only the beginning, the functionalities of DLCs will expand further in the future, showing the true potential they can achieve.
Conclusion
Discrete log contracts or DLCs open fresh opportunities for privacy, efficiency, and innovation on the blockchain network. DLCs increase the use of smart contracts that go beyond simple sports betting and wagering and incorporate data from the real world into the blockchain network. DLCs open BTC smart contracts to multiple use cases to enhance several functions of our day-to-day lives.