Discreet Log Contracts (DLCs), an MIT invention that became possible with Taproot’s introduction of Schnorr signatures. DLCs were originally proposed by Tadge Dryja, the co-creator of the Lightning Network, as a way to enable smart contracts to conditionally move Bitcoin. This innovative approach allows for creating financial contracts that depend on external events, which is crucial for implementing complex DeFi functionalities directly on the Bitcoin blockchain.
In Shell Finance, DLC is implemented as the core technology for the liquidation process. DLC ensures that the liquidation process in a trustless way without any centralizd third party. Here’s how DLC is used in practice:
Loan Initiation: When a user initiates a loan by collateralizing Bitcoin inscription assets (such as Ordinals, Runes, Atomicals, and BRC-20), Shell Finance calculates the loan amount based on the collateral value. A DLC contract is then set up, initializing a secret value used for future liquidation scenarios.
Loan Adjustment: Users can adjust their collateral or debt amounts throughout the loan's lifecycle. Each adjustment recalculates the collateral ratio using real-time data from Oracle, ensuring the loan remains properly collateralized. The DLC is updated accordingly to reflect any changes.
Liquidation: The most critical application of DLC in Shell Finance is during liquidation process. If the collateral value drops below the required minimum collateralization ratio (MCR), the DLC allows for the automatic liquidation of the position. Here’s how it works:
The oracle provides a price update indicating that the collateral value has fallen below the liquidation threshold.
This triggers the disclosure of the secret value within the DLC, enabling the protocol to execute the liquidation.
The assets are then auctioned off in a Dutch auction style, with the proceeds used to repay the debt and any excess added to Shell Finance’s insurance fund.
DLC.Link’s platform enables the user to lock BTC into a DLC to mint dlcBTC. The DLC itself is a special multisig UTXO where users retain one key. This innovative design safeguards Bitcoin deposits with the full hashrate of the Bitcoin network. Furthermore, in the DLC, payout addresses are predetermined and locked in during the deposit phase. This means that in the event of a breach, hackers are unable to redirect or steal the deposits. This innovation makes dlcBTC a “theft-proof” Bitcoin bridge.
Attestor Model Ensures Bitcoin Stays Yours, No Custody Required
With a traditional bridge, deposits are locked into a validator network, and are kept in pools in various wallets. In stark contrast, DLC.Link's Attestor system enforces the DLC locking mechanism without ever taking possession of user keys or assets. dlcBTC is set to revolutionize the way Bitcoin is utilized in the world of DeFi. This platform is not just another bridge; it offers a secure, impenetrable structure that respects the sanctity of user sovereignty and eliminates the common vulnerabilities associated with custodian-based bridges.
Shell Finance is a trustless lending and stablecoins protocol built on the Bitcoin L1, supporting Bitcoin and Bitcoin layer1 assets like Ordinals NFT, BRC-20, ARC-20, Runes as collateral.
DLC.Link harnesses the power of Discreet Log Contracts (DLCs) to establish a trustless bridge between Bitcoin and Ethereum. DLC.Link launched dlcBTC, enabling depositors to self-wrap their Bitcoin for DeFi on Ethereum while retaining full custody of their assets.