Discreet Log Contracts (DLCs) are smart contracts that run on Bitcoin. While executing a DLC, the parties involved do not publicly reveal the transactions’ details but instead deploy the underlying cryptographic algorithm to secure an agreement that also includes a neutral third party in the contract’s execution. Contrary to other smart contracts, this allows for greater privacy, security, and confidentiality.
This article will provide a detailed overview of Bitcoin Discreet Log Contracts, how they work, and their application across various industries.
What Are Bitcoin Discreet Log Contracts?
Bitcoin Discreet Log Contracts implement a peer-to-peer system to facilitate conditioned transactions. Primarily, the transacting parties can place “bets” within the blockchain network to complete a transaction.
Most of Bitcoin’s technological developments have been focused on improving privacy and security. Therefore, DLCs offer a much-needed solution to secure Bitcoin transactions involving contracts between two or more parties.
More specifically, Bitcoin Discrete Log Contracts aim to provide a secure digital line of communication and agreement when the parties agree to exchange funds based on the outcome of a given event. The tech stack that facilitates such transactions for DLCs includes Bitcoin bridges and oracles.
The Bitcoin protocol script lacks the necessary technology to connect the real world to the blockchain network. Consequently, Bitcoin’s native protocol requires employing a second-layer protocol such as Blockstack or RSK.
However, with the DLCs, the Bitcoin protocol can execute such transactions in its native framework without the need for scaling solutions.
How Do Bitcoin Discreet Log Contracts Work?
The Bitcoin blockchain in its native framework cannot execute an oracle-based smart contract. Therefore, this calls for an external technology link (Digital Log Contracts) to complete such transactions.
What is the underlying protocol behind the DLCs Technology?
Bitcoin Discreet Log Contracts technology is more straightforward than it seems.
DLCs execute smart contract transactions on the Bitcoin blockchain without revealing their identity to third parties. In this way, they act as a link between smart contract transactions and off-chain data sources.
The approach that makes it possible to not reveal keys to third parties is called elliptic curve cryptography and helps create a sequence of encrypted data that only parties to the transaction can understand. Additionally, the encrypted data n is then used to automatically enforce the terms of the contract without the need for any input from the involved parties.
Setting up a DLC requires three parties. The two entities involved in the transaction and the third one, the oracle. The involved parties lock funds in a multisig wallet, which is only released when the oracle generates the specified information. The DLC’s oracle can take the form of various data feeds. Once the conditions in both parameters are met, the locked funds will be automatically released to the winning side of the pre-set conditions.
The ‘Oracle Problem’
A surprising concept of DLCs. To overcome the oracle problem, DLCs are designed to ensure that the oracles aren’t in a position to determine the winner or see the contract conditions.
Oracles’ primary objective is to confirm the occurrence of a specific outcome and not undertake any role in the transaction. This improves DLC’s transactional privacy.
Bitcoin Discreet Log Contracts Use Cases
The application of Bitcoin DLCs has been there over the years. However, recently they’ve become adequately feasible for practical application.
Bitcoin Discreet Log Contracts enables a wide range of applications, such as futures contracts, digital insurance policies, and secure prediction markets. Given the fact that DLCs are executed on blockchain and crypto networks, it makes them safer, transparent, and easily auditable.
Let’s take a look at two examples use cases.
Betting
One of DLC’s notable applications is in gambling and sports betting. Betting platforms that leverage Discreet Log Contracts have three benefits: eliminating the need for third-party custody of funds, keeping sensitive information private, and avoiding a sportsbook, which allows the parties to increase their odds. In rare cases where a bet has thousands of potential outcomes, parties can save a lot in terms of energy requirements and transaction fees.
Insurance
Discreet Log Contracts have enhanced information parity and ensured fair outcomes in insurance agreements without having to reveal sensitive data. While insurance is nothing close to gambling, both industries rely on conditioned payments. Say, for instance, the insured will receive compensation if they crash their car. It is industries that rely on a business model like this one that will benefit the most from Discreet Log Contracts.
Wrap up
Every blockchain network primarily concerns transactions’ security, privacy, and transparency. Bitcoin Discreet Log Contracts provide the much-needed security confirmation to the Bitcoin blockchain.
The technology is past its early development stages; therefore, its future adaptation in various industries is imminent. In the coming years, DLCs will have a more significant role in Bitcoin blockchain privacy, security, and transaction transparency.
