I. The Best Approach to the BTC Ecosystem

At the beginning of this year, with the popularity of Ordinals, the BTC ecosystem has also grown, encompassing both on-chain data streams represented by tokens like inscriptions and BRC20, and off-chain data streams represented by Lightning Network, Stacks, and others. Many teams have started exploring how to replicate foundational infrastructure like DeFi and NFTs on the Bitcoin network. However, we believe that due to the lack of smart contract support, Bitcoin is inherently unsuitable for complex on-chain applications, with its primary narrative remaining as “digital gold” for investment in the short term.

At the same time, Bitcoin’s proof of work network enables greater security and longevity, making it a valuable asset class that we believe will continue to grow.

Therefore, when it comes to BTC + DeFi, there are two best paths:

The project we have invested in, DLC.Link, falls under the first path mentioned above.

II. The Demand of WBTC Persists

The collapse of FTX at the end of last year dealt a severe blow to the entire blockchain industry. This impact was not limited to finances and confidence but also had direct repercussions for specific critical infrastructures within the industry. For instance, Ren Protocol suffered due to its association with Alameda, leading to a lack of operational funds and the direct shutdown of the Ren 1.0 network. The planned Ren 2.0 upgrade has entered an “indefinite waiting” phase.

RenBTC was once one of the most commonly used forms of wrapped BTC on-chain, second only to WBTC. However, with the subsequent shutdowns of Ren and Multichain (which issued multiBTC), the market once again found itself dominated by centralized WBTC. Decentralized wrapped BTC offerings like Threshold and Badger have been struggling to gain market share and are far behind the levels RenBTC had achieved in its prime. Wrapped BTC is facing a situation reminiscent of the awkward position decentralized exchanges (DEXes) were in during 2017–2018. Despite blockchain’s promotion of decentralization, 99% of trading still occurs on centralized exchanges (CEXes). The rise of DeFi during the summer of 2020, with projects like Uni and Curve, addressed this problem in the DeFi space. However, regarding one critical component of DeFi, wrapped BTC, the market continues to be dominated by centralized WBTC. The demand for WBTC has persisted for far too long.

III. New Technology — Discreet Log Contracts

The Taproot upgrade has introduced numerous possibilities for technical expansion in the BTC ecosystem. BRC20, Inscriptions, RGB, and others rely on Taproot technology as their foundation. However, there is another new technology that has not received much attention but holds significant potential — Discreet Log Contracts (DLC).

In simple terms, DLC is a mechanism similar to multi-signature setups. Leveraging the Taproot upgrade’s support for Point Time-Locked Contracts (an upgraded version of Hash Time-Locked Contracts, HTLC) and Schnorr signature technology, DLCs are a low-level primitive that was originally intended to help enable smart contracts on Bitcoin. However, it’s perhaps better thought of as an if-then statement on Bitcoin (which itself is not Turing complete), where the condition is determined by off-chain data from a smart contract on another chain. This enables a wide range of applications, such as peer-to-peer lending, derivative contracts, sports betting, prediction markets, and insurance, through multi-signatures and predefined conditions on the BTC network.

You might wonder how this differs from the common 2/3 multi-signature setups in the Ethereum ecosystem. The most crucial distinction is the role of the Bitcoin Attestor, also known as the oracle. This entity does not have specific knowledge of the contract using its data, and therefore cannot determine the outcome of a particular contract. This fundamentally eliminates the possibility of collusion between one party and the oracle, providing security almost equivalent to Bitcoin. Besides, DLC. Link’s groundbreaking innovation is that the “oracle” that the original DLC whitepaper referred to is further split out into three parts: an oracle layer (such as Chainlink or Pyth), a smart contract running on a blockchain (e.g., a Defi contract running on Ethereum), and a component that DLC.Link provides an “Attestor” that can take data from the smart contract and translate it to instructions that settle the DLC.

It is important to note that when renBTC was the leader in decentralized wrapped BTC, it primarily relied on the Ren network’s MPC nodes for generation. In other words, the security of renBTC, or most wrapped BTC offerings, had no direct relationship with the Bitcoin main chain. The security of renBTC was tied to the Ren network, and WBTC even relied on endorsements from centralized institutions. This is one of the reasons why wrapped BTC has struggled to gain traction. Imagine you are a large holder with 100 BTC in your possession; would you confidently send all your BTC to an address that does not belong to you for a 5–6% yield and trust the entity or network behind that address?

‘Not your keys, not your coins’ is the mantra for the majority of Bitcoin holders.

In contrast, the DLC approach, combining multi-signatures and oracles, is more likely to resonate with Bitcoin holders from a rational technical standpoint and a gut feeling perspective.

IV. Use Cases Unlocked by DLC.Link

In general, DLC.Link’s roadmap is divided into three major milestones — each step advancing only after market validation of the previous one. This cautious approach avoids potential security or other risks associated with rushing into things for quick gains.

The first step could be considered a “Semi-Decentralized” approach to using BTC to mint stablecoins. In this scenario, the counterparties on both sides of the DLC are well-known CeFi or Defi institutions (using MakerDAO as an example) and large Bitcoin holders. The Maker and the Holder sign contracts through DLC, setting parameters such as liquidation criteria. BTC is locked upon signing, and Maker mints DAI to the Holder on the ETH side. When the Holder burns DAI within the specified parameters, the Bitcoin is automatically unlocked and returned to the Holder’s address. In the event of liquidation, the Bitcoin is automatically unlocked and returned to Maker’s address.

A breakthrough was recently achieved in the DLC.Link technology, allowing the DLC.Link officials act as the counterparty (opposite party) to BTC Holders in signing DLC contracts as administrators. However, during settlement, BTC is directly transferred to the settlement party’s BTC address, such as Maker. This simplifies the entire lending process for institutional involvement and ensures that BTC only flows to the Holder or the lending institution, with funds remaining completely separate from the DLC.Link official in any circumstance.

This step primarily involves the participation of large BTC holders and centralized finance (Cefi) institutions, representing a style that combines decentralized lending with centralized clearing.

In the first step, the Proof of Custody (POC) primarily functions as a “voucher” for repayment or centralized clearing and is non-transferable.

The second step will further expand the use cases for DLC by transforming the POC from the first step into something more versatile and transferable, similar to assets like Wrapped Bitcoin (WBTC), which are ERC-20 tokens.

In this model, the DLC official acts as the counterparty to all Bitcoin Holders who come to “deposit” their coins and also serves as the issuer of dlcBTC. Like renBTC, dlcBTC is not highly concerned about detachment issues. In such cases, purchasing dlcBTC at a lower price and redeeming it for the original BTC becomes an arbitrage opportunity. The difference is that unlike renBTC, where anyone can redeem it freely, dlcBTC can only be redeemed by the initial Bitcoin Holders who deposited the coins. The team plans to introduce the role of a Merchant in the later stages (involving collaborations with various reputable institutions and market makers), restricting access to who can use the bridge so as only to allow “qualified retail” and large institutions to mint and burn dlcBTC

At that point, dlcBTC can directly participate in the DeFi ecosystem, such as Uniswap, AAVE, Curve, etc., similar to WBTC, while still maintaining a security level close to that of the original BTC chain. This is a feature that no other solution on the market could currently provide.

The third step is an extension and further decentralization of the second step.

On the extension front, after the ERC-20 version of dlcBTC is validated, dlcBTC will continue to expand into ecosystems such as Cosmos, Solana, Move, etc. Some ecosystems have already expressed interest in collaborating.

On the decentralized front, while the second step uses a somewhat centralized Attestor, the third step will decentralize the Attestor completely. This doesn’t imply any risk to user funds from the second step. Similar to the scenario faced by Layer2 Sequencers, centralization is primarily for security and efficiency during the cold start. The ability for both centralized Sequencers and Attestors to act maliciously is extremely limited (mainly manifested in the ability to “reject” legitimate transactions), and there is no motivation to do so. However, in the long term, decentralization remains in line with the core and ethos of Web3.

Apart from the “mainline tasks” of the three steps mentioned above, given the recent popularity of Brc20, the demand for native lending based on the Ordinal protocol, and the exploration of “BTC Layer2” by many teams, DLC.Link can also play a crucial role as infrastructure for BTC Layer1 peer-to-peer lending and bridging BRC20 into “BTC Layer2” cross-chain bridges.

DLC.Link has secured grants from ChainLink and Stacks and is actively discussing how to integrate native BTC into the business/ecosystem of several Cefi institutions and multiple smart contract-enabled blockchains. DLC.Link is currently the most optimal solution for bringing BTC into other public blockchain ecosystems we see in the market. We have reason to believe that in the next bull market cycle, DLC.Link will become one of the essential infrastructure elements in the BTC ecosystem. More BTC will enter various ecosystems through DLC.Link, creating higher value for Holders and unlocking more possibilities.