Bixin Ventures’ Pre-seed Investment in DLC.Link for Enhanced Bitcoin Ecosystem Integration

Bixin Ventures
6 min readFeb 5, 2024

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Introduction

As an early holder of BTC and a staunch supporter of BTC, Bixin Ventures has consistently been involved in the development of the BTC ecosystem. We have always believed, and continue to hope, that BTC assets can play a more significant role and generate greater returns in excellent DeFi protocols across various chains. From this perspective, a secure and efficient cross-chain bridge is essential. Therefore, in the earliest rounds last year, we invested in DLC.Link.

With the rise of Ordinals and the expanding web of on-chain and off-chain Bitcoin data streams, a clear trend emerges toward diversifying Bitcoin’s applications. Due to the inherent challenge of Bitcoin’s limited native smart contract functionality, Bixin views DLC.Link as a strategic solution. There is tremendous market demand for a secure, decentralized wrapped Bitcoin alternative, especially post-FTX collapse, emphasizing the risks of centralized infrastructures. DLC.Link aligns with Bixin’s vision of a more secure and trustless ecosystem and fortifies Bitcoin’s role across a diverse array of applications.

DLC.Link Technology

How do DLCs Utilize Schnorr Signatures in Taproot Upgrade?

The Bitcoin Taproot upgrade introduced Schnorr signatures, a more secure alternative to ECDSA for creating and verifying keys. Schnorr signatures have the useful property of linearity, allowing for efficient verification of multiple transactions by combining public keys and signatures [1]. Discreet Log Contracts (DLC) utilize Schnorr and PTLCs, which were implemented with Taproot, and thus are already native to Bitcoin. With DLCs, there is no need to use an L2 or sidechain. Instead, DLCs are secured by the entire hashrate of the Bitcoin network.

In a loan scenario using DLCs, Schnorr signatures are employed for conditional outcomes. Both parties generate a unique key, combine it with their long-term keys to create a “public key,” and prepare a signature in advance for potential outcomes like repayment or liquidation. A decentralized attestor network later confirms real-world outcomes using a discreet log number to unlock pre-signed signatures, triggering contract execution on the blockchain [2]. This showcases the adaptability, flexibility, and security of DLCs in practical applications.

How DLCs Secure Bitcoin On Chain without Validators

Discreet Log Contracts (DLCs) inherits Bitcoin security by eliminating external validators, ensuring on-chain safety [2]. Within the DLC.Link architecture, the Attestor network is an innovative design. Attestors, acting as off-chain services, actively monitor blockchains with smart contracts, announcing DLC events publicly via JSON. They attest to outcomes, signing values from a data source, most often a smart contract on another blockchain. To enhance security, DLC.Link employs a 5-of-7 Attestor signing approach, reducing collusion risks. The DLC.Link Manager contract randomly selects whitelisted Attestors for trustless selection [3]. Design choices also allow third party organizations to run Attestor nodes, promoting decentralization. Avoiding single point of failure, distributed attestors facilitate DLC creation and signing requests efficiently. This comprehensive design not only confirms the integrity, security, and flexibility of Bitcoin transactions but also establishes DLC.Link as ideal infrastructure to intergrate BTC with decentralized finance (DeFi).

How FROST Pioneer Advanced Security for DLCs

DLC.Link is also integrating FROST (Flexible Round-Optimized Schnorr Threshold Signatures) to improve security and streamline attestor management. FROST’s key resharing capability stands out, empowering dynamic management of the Attestor network and allowing for swift adjustments without compromising service integrity [4]. When setting up or changing Attestors, collaborative key generation is used. This process creates both a shared key and individual shards for each Attestor. The flexibility of this key generation mechanism ensures that the Attestor network can be modified later on securely and without any interruption to the service.

During the announcement phase triggered by a blockchain event, a coordinator from the Attestors disseminates the create-dlc command, leading to a consensus-backed DLC announcement. Similarly, to close a DLC, a blockchain event prompts a coordinator to orchestrate the creation of a DLC attestation, with each Attestor’s signature ensuring a secure and verified end to the contract. This advanced upgrade introduces dynamic adjustment capabilities to the Attestor network, markedly reducing computational complexities while upholding rigorous security standards.

Figure 1. DLC.Link Technical Flow

DLC.Link Products

dlcBTC

Launching in early 2024, dlcBTC stands at the forefront of decentralized finance (DeFi), offering a non-custodial representation of Bitcoin on the Ethereum network through the implementation of Discreet Log Contracts (DLCs). With dlcBTC, the user “self-wraps” the deposit and locks BTC with themselves, with attestors securing the locking mechanism. dlcBTC depositors do not send BTC to DLC.Link or to any third-party.

In this groundbreaking process, users securely lock their Bitcoin into a DLC using DLC.Link’s bridge, resulting in the creation of equivalent dlcBTC tokens. The DLC, acting as a secure lockbox on the Bitcoin blockchain, establishes a pre-signed agreement between the user and the protocol. Notably, key distribution employs a 2-of-2 multisig UTXO mechanism, where one key is held by the user and the other is intelligently distributed among a network of trusted attestor nodes.

Bridging has gotten a bad reputation due to its many vulnerabilities. DLCs are a unique solution in that they solve the problem of cross-chain communication without the security concerns of bridges. Unlike bridged assets such as wBTC, dlcBTC eliminates the need for intermediaries, choosing instead to secure assets secured by the entire hash rate of the Bitcoin network. Launching in Q1 2024, dlcBTC v1 will introduce features like whitelisted access, stringent security measures, versatile trading pairs, and seamless integration with existing DeFi protocols, marking a significant advancement in the realm of decentralized finance [5].

We believe that, after Bitcoin, the most decentralized network is Ethereum. So with dlcBTC, we are committed to bringing native BTC to Eth DeFi, without needing to build another L2 or solution that would be orders of magnitude smaller, untested, and riskier. The minted dlcBTC tokens find utility as collateral within prominent DeFi platforms such as Curve and AAVE and enable users to actively participate in DeFi activities such as investing, lending, and hedging.

DLC.Link’s Applications in the Broader BTC Ecosystem

DLC.Link is a transformative force within the broader BTC ecosystem, offering an array of applications through its Discreet Log Contracts (DLCs). This innovation holds particular significance for various entities, including credit trading desks, prime brokers, digital asset custodians, exchanges, and OTC desks. The integration allows custodians to extend financial services to self-custodied Bitcoin clients, escrow and conditionally move native Bitcoin with instant finality, and provide borrowing services to miners and other self-custodied Bitcoin clients.

DLC.Link’s role in decentralized finance (DeFi) is extensive and influential as well. Its integration facilitates the development of loans and stablecoins backed by on-chain Bitcoin collateral, providing advantages for lending and borrowing protocols. Furthermore, DLC.Link seamlessly extends its reach to cross-chain protocols, enabling the transfer of native Bitcoins across diverse blockchains. Recognizing the popularity of BRC-20 assets, DLC.Link can facilitate their transfer into cross-chain bridges [6]. Additionally, it enables the trading and borrowing of ordinals in NFT marketplaces such as OpenSea and other smart contract-based platforms, enabling new use cases in DeFi.

Figure 2. DLC.Link Broad Applications

Conclusion

The reason why Bixin Ventures strategically invested in DLC.Link during the early seed round is to facilitate its seamless integration with decentralized finance (DeFi) and address the challenges faced by the Bitcoin ecosystem. DLCs, overcoming Bitcoin’s smart contract limitations, provide a secure alternative by leveraging Bitcoin’s robust security. Taproot’s recent enhancement with Schnorr Signatures helps DLC.Link to establish attestor networks and the integration of FROST further refines dynamic management of attestors. dlcBTC meets rising demand for a secure, decentralized self-wrapped Bitcoin. Additionally, DLC.Link holds promising potential for facilitating multiple products, including self-custody deposits in CeFi and cross-chain ordinals in DeFi. Bixin Ventures’ strategic move reflects a commitment to shaping the future of DeFi, acknowledging DLC.Link’s innovation within the crypto landscape and foreseeing its pivotal role in providing Bitcoin liquidity throughout the broader crypto ecosystem.

References

[1] Namcios. Why You Should Care About Taproot, The Next Major Bitcoin Upgrade. Bitcoin Magazine. Retrieved from https://bitcoinmagazine.com/technical/short-bitcoin-taproot-explainer

[2] Dryja, T. Discreet Log Contracts. Retrieved from https://adiabat.github.io/dlc.pdf

[3] DLC.Link. How DLCs Secure Bitcoin On Chain without Validators. Retrieved from https://www.dlc.link/blog/how-dlcs-secure-bitcoin-on-chain-without-validators

[4] Komlo, C., & Goldberg, I. FROST: Flexible Round-Optimized Schnorr Threshold Signatures. Retrieved from https://eprint.iacr.org/2020/852.pdf

[5] DLC.Link. DLC.Link Introduces dlcBTC. Retrieved from https://www.dlc.link/blog/dlc-link-introduces-dlcbtc-a-game-changing-bitcoin-bridge-for-trustless-defi-operations

[6] DLC.Link. DLC.Link Docs Generic Use Cases. Retrieved from https://docs.dlc.link/applications/generic-use-cases

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Bixin Ventures

Established in 2017, focusing on venture capital in the area of blockchain https://bixinvc.com/