Feb 11, 2022
In this episode of Bitcoin,
Explained, hosts Aaron van Wirdum and Sjors Provoost are
joined by resident sidechain and Layer Two expert Ruben Somsen
again, this time to discuss Discreet Log Contracts
(DLCs).
Discreet Log Contracts are a type of smart contracts for Bitcoin,
first proposed by Lightning Network white paper coauthor Tadge
Dryja. In essence, DLCs are a way to perform bets— but this means
that they can ultimately be leveraged for all sorts of financial
instruments, including futures markets, insurances and
stablecoins.
At the start of the episode, Aaron, Sjors and Ruben discuss what
can be considered a type of proto-DLC, namely a multi-signature
setup for sports betting where two participants add a neutral third
party (an “oracle”) that can resolve the bet one way or the other
if needed. The trio explains, however, how this solution comes with
a number of downsides, like the difficulty of scaling it.
From there, Aaron, Sjors and Ruben go on to explain how DLCs solved
these problems using a setup that resembles payment channels as
used on the Lightning Network. When structured like this, they
explain, oracles merely need to publish a cryptographically signed
message about the outcome of an event, which can be used by the
winning participant of the bet to create a withdrawal transaction
from the payment channel.
Finally, Ruben explains how the original DLC concept
could be streamlined by using adaptor signatures, a sort of
“incomplete signatures” that can be made complete using the signed
message from the oracle. With adaptor signatures, DLCs no longer
require a separate withdrawal transaction, as the winner can claim
funds from the payment channel directly.