Discussion on the Technical Principles and Optimization of DLC

1. Overview

Discrete Log Contracts ( DLC ) are a contract execution scheme based on oracle technology, proposed by Tadge Dryja from MIT in 2018. DLC allows parties to make conditional payments based on predefined conditions, with participants determining possible outcomes and pre-signing in advance, using these pre-signatures to execute payments when the oracle signs the result. DLC enables new types of decentralized financial applications while ensuring the security of Bitcoin deposits.

Compared to the Lightning Network, DLC has the following advantages:

• Better privacy protection
• Supports complex and flexible financial contracts
• Reduce counterparty risk
• No need to manage payment channels
• Has good scalability in complex contracts

However, there are still some issues with the DLC that need to be resolved, such as:

• Risk of oracle key leakage or loss
• Centralization Issues of Oracles
• Decentralized oracles cannot perform key derivation
• Oracle Conspiracy Risk
• Fixed denomination change limit

2. How DLC Works

Taking Alice and Bob's bet on the parity of the hash value of the n+k-th block as an example:

1. Key Generation: The oracle, Alice, and Bob each generate their private and public keys.

2. Capital Injection Transaction: Alice and Bob create a capital injection transaction, each locking 1 BTC into a 2-of-2 multi-signature output.

3. Contract execution transaction: Create two contract execution transactions for spending the capital injection transaction ( CET ).

4. The oracle computes and broadcasts the commitment.

5. Alice and Bob calculate their new public keys.

6. Settlement: The oracle generates a signature based on the hash value of the n+kth block.

7. Withdrawal: The winning party withdraws the locked assets using a new private key.

3. DLC Optimization Plan

3.1 Key Management

To enhance security:

• Use BIP32 to derive child or grandchild keys for signing
• Use the private key and the counter hash value as a random number

3.2 Decentralized Oracle

Implementing decentralized oracles with Schnorr threshold signatures, featuring:

• Enhance Security
• Distributed Control
• Improve usability
• Flexibility and Scalability
• Accountability

3.3 Decentralization and Key Management Coupling

Use a distributed key derivation method to achieve key derivation in the threshold signature scenario.

3.4 OP-DLC: Oracle Trust Minimization

Introduce an optimistic challenge mechanism, where oracles must stake in advance. Any honest participant can initiate a challenge to penalize malicious oracles.

3.5 OP-DLC + BitVM Dual Bridge

Combine BitVM to solve the DLC funding change issue, achieving:

• Arbitrary granularity change
• Multiple deposit and withdrawal channels
• Oracle Trust Minimization
• Improve capital utilization

4. Summary

DLC, combined with new technologies such as Taproot and BitVM, can achieve more complex off-chain contract verification and settlement. Through the OP challenge mechanism, it can minimize oracle trust, bringing new application prospects to the Bitcoin ecosystem.