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Discreet Log Contracts (DLCs)

Discreet Log Contracts (DLCs) enable Bitcoin smart contracts that depend on external data (oracles) without revealing contract details on-chain until execution.

DLCs are smart contracts that:

  • Use oracles: Depend on external data (prices, events)
  • Privacy-preserving: Contract terms hidden until execution
  • Trustless: No need to trust oracle (uses adaptor signatures)
  • Bitcoin-native: Work on Bitcoin blockchain

How DLCs Work

Oracle Attestation

1. Oracle signs outcome data
2. Signature reveals outcome
3. Contract parties use signature
4. Contract executes based on outcome

Adaptor Signatures

DLCs use adaptor signatures:

Adaptor Signature:
- Pre-commits to outcome
- Reveals outcome when used
- Enables trustless oracle integration

Use Cases

Prediction Markets

Example:
- Contract: "Bitcoin price > $50,000 on Jan 1"
- Oracle: Provides price data
- Outcome: Funds go to correct party

Derivatives

Example:
- Contract: Price difference payment
- Oracle: Provides reference price
- Settlement: Automatic based on price

Insurance

Example:
- Contract: Weather-based insurance
- Oracle: Provides weather data
- Payout: Automatic if conditions met

Code Examples

Creating a DLC

Oracle Providers

Types of Oracles

  1. Single Oracle: One data source
  2. Multi-Oracle: Multiple sources, consensus
  3. Decentralized Oracles: Distributed data sources

Trust Model

Oracle Trust:
- Oracle provides data
- Parties trust oracle accuracy
- Adaptor signatures prevent oracle from stealing
- Oracle can't change outcome after signing

Limitations

Current State

  • Early stage: Active development
  • Limited tooling: Few user-friendly implementations
  • Oracle dependency: Requires trusted oracles
  • Complexity: Technical knowledge required

Challenges

  • Oracle reliability: Need trustworthy data sources
  • Contract complexity: More complex than simple payments
  • Adoption: Limited awareness and usage

Resources