Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Aki Balogh: DLC Link – Self-Wrapped Bitcoin (dlcBTC)

Episode Date: December 16, 2023

gnosis.ioUnlike Ethereum ‘programmable money’, Bitcoin lacks native smart contracts by design. In an attempt to expand Bitcoin past its store of value narrative, wrapper contracts provided wBTC on other chains for DeFi applications. However, wBTC does not directly represent the native asset and it is, therefore, subject to potential exploits. DLC Link introduces a novel approach, by allowing entities to self-wrap dlcBTC.We were joined by Aki Balogh, co-founder of DLC Link, to discuss discreet log contracts, their trust assumptions and what they mean for Bitcoin’s use cases and liquidity.Topics covered in this episode:Aki’s background and switching from AI to cryptoDiscrete Log Contracts (dlc)Trust assumptions in dlcBTC bridges and dlc attestersThe non-fungibility of dlcBTCPotential regulationsCurrent status and roadmapOther BTC bridgesEpisode links:Aki Balogh on TwitterDLC Link on TwitterEpicenter's 10-year anniversary live streamSponsors:Gnosis: Gnosis builds decentralized infrastructure for the Ethereum ecosystem, since 2015. This year marks the launch of Gnosis Pay— the world's first Decentralized Payment Network. Get started today at - gnosis.ioChorus One: Chorus One is one of the largest node operators worldwide, supporting more than 100,000 delegators, across 45 networks. The recently launched OPUS allows staking up to 8,000 ETH in a single transaction. Enjoy the highest yields and institutional grade security at - chorus.oneThis episode is hosted by Meher Roy. Show notes and listening options: epicenter.tv/526

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NOSIS builds decentralized infrastructure for the Ethereum ecosystem. With a rich history dating back to 2015 and products like Safe, CowSwap, or Nosis chain, NOSIS combines needs-driven development with deep technical expertise. This year marks the launch of NOSIS pay, the world's first decentralized. centralized payment network. With a Gnosis card, you can spend self-custody crypto at any visa-accepting merchant around the world. If you're an individual looking to live more on-chain or a business looking to white-label the stack, visit nosispay.com. There are lots of ways you can join the Nosis journey. Drop in the NOSIS Dow governance form, become a NOSIS validator

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Today I am talking to Aki Balog, who is the co-founder and CEO of DNC Link. This is a kind of a visionary project that's figuring out a new architecture to bridge Bitcoin from Bitcoin to the other ecosystems like Ethereum. Now, of course, a lot of projects have tried and implemented commercial. systems to do similar things, but they have a really cool architecture that minimizes the trust required in the bridging technology. So please welcome Aki to the show. Hi Aki. Hey, thanks for having me.

So tell us first about how you entered into the crypto ecosystem, into this madhouse. Well, I'm very happy to be here. I came in full time three years ago. I guess just a quick background on me, I've been a developer since I was like nine or ten. I went to a computer science undergrad or actually instead of high school, I did college, college degree in CS and then BVA undergrad. And yeah, I was in AI for over 10 years actually. I was an AI VC or machine learning big data VC when the NoSQL stuff started in 2011.

So I got into data management then. I actually heard about Bitcoin in 2011, 2012, actually, but I didn't have the space to kind of the mind space to get it then because I was building an AI company, an AI marketing tech company called MarketMuse, which I founded it led for eight years. And so when I stepped away at MarketMuse and, you know, we put a CEO in there to run it, I thought this would be the appreciate time to come to Web 3. it's just the amalgamation of a lot of things that I was interested in, finance, crowdfunding, data managing database tech, you know, self-sovereignty, empowering people, you know, giving people good options in also in developing countries. I was born in Hungary in a smaller town called Devretzanne and we grew up in, you know, Boston and Michigan. So it just, all of it came together and finally had the mind space to get into the space. And my father had been a scientist. And my father had

been a scientist all his career. And so also with MarketMuse, I just, I found my niches, you know, finding technologies that, uh, that could really be developed into products and figuring out how to productize and commercialize it. Um, I did that with my last company. I, I am a co-author on two patents, or I guess I don't know what the term. I have two patents in the area of topic modeling and semantic keyword analysis. And so when I came to crypto, I wasn't, I wasn't a cryptographer. I don't think I have that background. But I found this opportunity, this white paper that Tadge at MIT had published.

And I met the DLC community. I met some brilliant people. And I thought this would be an area where I could help in. And then I found my co-founder, Jesse. And then we've been kind of trying to be active members of the DLC community for over two years now. That's really cool. I'm curious if you have any regrets switching away from AI to Web 3 and then maybe one year into your journey chat GPT launched

and such a huge AI boom kicked off. It was funny that I was in AI when two, maybe arguably too early before this and missed out on the big run-up of Bitcoin and East. I heard about both. I just couldn't really participate. and then I came to crypto, it crashed and AI went up. It's sort of the joke.

But I don't really honestly don't have regrets because I'm really focused on building things that add value for society. I know that's always like a thing founders say, but for me it's true that, you know, I love my father's kind of love for invention and kind of primary research and, you know, basic research. and I always wanted to build things that just really make a difference. And, you know, I think AI helps in a lot of ways. Web3 helps in a lot of ways. On some level, these are all infrastructure, and it's really about what we build with these tools. But I'm still somewhat involved with some AI companies.

Actually, our friend that introduced us on Shull is heavy into AI. We talk about it almost every week. So, you know, but I'm happy to be here. And I just want to make a difference with, you know, with our work. And that's, we're getting a lot of that here. And I think the timing now is very strong because, you know, we've got the having coming up. We've got Bitcoin ETFs launching. You know, Bitcoin has sort of crossed the chasm.

It's in use by people in El Salvador and other places on a mass scale. And that's what attracted me to, you know, to this bit, you know, to building on Bitcoin, quote, unquote. I think that the time has come for this to be, you know, more easily. use of all that before. Right. So you mentioned that you started out meeting Tash and the DLC community, DLC standing for discrete log contracts. And that's kind of like the core pillar on which your commercial efforts are further

inventing on top of that. So let's start there. What is a discrete log contract and why were they invented? Yeah, yeah. So, Tange, Padge also is probably most known for his other invention, the Lightning Network. So right before he published a lightning white paper, he published this white paper on DLCs entitled, like, Smart Contracts on Bitcoin. The original idea was how can we, you know, add some sort of logic to Bitcoin. And he kind of, you know, proposed a math around it where basically you can have, you know, two parties, Alice and Bob, you know, put some Bitcoin. and make sort of a bet, maybe like a sports bet.

And then you have this off-chain entity, quote-to-quote Bitcoin Oracle, Olivia, the Oracle, that decides who won the bad. And then there's a, you know, cryptographic. Tatch proposes a cryptographic way to kind of, to execute this. So that the, so that, for example, the off-chain entity, the attester, does not know who the parties are. It's just signing, you know, outcomes or publishing attestation. And then the parties, you know, basically the big invention that we also utilize is when the, when the users deposit Bitcoin, they pre-sign the addresses where it can go.

So you have predefined everything up front and it's sort of a secure system. And so there was a company called Shortbits. Chris Stewart and Nadav Cohen were primarily driving that. And they had built a community around this. they had implemented the first, you know, DLC technology. And so they were really the thought leaders, you know, driving these discussions. And they had these monthly DLC kind of meetings. And we would talk about the spec and kind of implementation of it.

And so when we came into the scene, those were the, you know, people we met. And we felt like there's a, you know, big opportunity here. But also that community was sort of running into some challenges because there wasn't It was hard to get liquidity on it. There wasn't like a market for sports betting with DLCs, mostly because people didn't really know what DLCs are. And like, how do you find your peers and, you know, what kind of bet? And then who is this mysterious Oracle that just happens to know everything?

That was always the quote-called Oracle problem. So anyway, we just thought we could kind of, you know, as the new people coming in, maybe give it some fresh eyes. And so we actually started looking at DLCs in a different way as a user locking Bitcoin with a protocol and the Oracle being like an Oracle that we're familiar with like a price speed Oracle like Chainlink or Pith. And they're being kind of a blockchain involved. And I can kind of describe that more. But we basically repositioned the narrative and our understanding of DLCs. And that's what we're building, you know, around now.

and I think that's what people will find very actionable. That's really cool. So actually, like, if we wrap our heads around the traditional DNC as envisioned by Tash, like if we have our heads around this

sports betting framework that maybe he had in his mind while writing the paper, and then it has this party, which is the Oracle. And then if we switch the Oracle from being, a single centralized party to being a protocol. When you make the jump from single centralized party to protocol, that is when you get from

the street log contracts to DNC link. So maybe we first start with kind of unpacking the original idea, which is like a sports bed. So I'm kind of imagining this as, let's say the two of us, Akian, Meher, A and M. we want to bet I don't know let's say a Bitcoin on the outcome of a of a gain

so maybe it's a soccer match two teams and the so I'm kind of imagining it as the two of us putting money into a transaction output so maybe I'm putting in one

Bitcoin there and you're putting in one Bitcoin there and then the realization is that at the end of the bed what can happen either two Bitcoin can come to me or two Bitcoin can come to you nothing else

makes sense so in a sense I sign a I sign a sort of transaction but it's not a transaction I sent to the blockchain

I I sign something that says in some scenario in the future two Bitcoin could come to me I signed that and I also sign in some scenario in the future two Bitcoin could go to A Aki

and you do the same and then these kind of signed transactions require a signature from some centralized party which is called an Oracle and this Oracle can kind of

observe the match get the results of the match and choose the correct transaction to sign it and then resolve the bet on the Bitcoin blockchain. Is that kind of right? Yeah, yeah, that's pretty much it. You can, I would just add in the original design too and in the way some protocols use it, you can have kind of virtually any number of outcomes. Right now we have seen as, we have done as high as 10,000 outcomes. So you could have, you know, one and a half and half and whatever different splits. But, uh, But yeah, we also found that the easiest way to think about it conceptually is like it all goes to Alice or it all goes to Bob. That's a very practical, you know, way to do it because then other data, you know, can be handled.

Logic can be handled in more sophisticated places elsewhere. So that's a good example. That's definitely you stick with that. And so, yeah, you basically have these a set of outcomes. I also describe it like an if then else statement or if then. statement. So if this condition happens, then send it to, you know, A, I'll send to B. You can do something like that. And so these, these create these kind of presignatures. They're called CETs, contract execution transactions. And basically, these are all predefined up front. So, you know,

both party, both, you know, Alice and Bob signed them. And then Olivia, the Oracle has kind of a a special role because the Oracle is not a party to the two of two multisig for security and privacy reasons, of course, but the Oracle does publish there. There's an Oracle announcement in the beginning, which is like, hey, you know, Alice and Bob basically choose the oracles. So, and you can have one or multiple oracles, and we could talk about that too, but let's say Alice and Bob chooses this particular Oracle, publishes an announcement, hey, you know, this is the Oracle. and the oracle uses this private key to publish like a number for each outcome, basically. So you can think of it as just a number.

So you have, you know, outcome one, outcome two. They each get it on. So one-time use number. And then the Oracle uses that nons in conjunction with its private key to publish, you know, two public keys, you know, for outcome one, outcome two. And then later when the outcome is loan, the Oracle publishes its active state. which is basically just another number corresponding to whichever outcome one. And then the, again, the Oracle is not a party to the multi-sig. So what happens actually is the Oracle publishes this number into a public space.

And then Alice or Bob, either Alice or Bob can grab that and, you know, and execute the transaction. And then either Alice or Bob have to actually execute it. the gas fees were also paid up front at deposit time, but, you know, presumably whichever party is, quote, called winning, has the incentive to execute the transaction. That's the base kind of DLC design. So that's really cool, right? So, of course, we know that in Ethereum, because you have a Turing complete Ethereum virtual machine, you could write how fund should be distributed in every outcome and Bitcoin lacks that.

But what discrete law contracts are saying is in any financial interaction, if you can define the set of final outcomes and it's a finite set, not an infinite set, then you can use the finiteness of possible outcomes as a way to constrain the system and through those constraints reduce trust in a centralized party. Right? Like that seems to be the essential insight. Yes. So maybe you know,

maybe you can take an example of a set which is like not finite where if I had to create a coin running on top of Bitcoin, then how the set of people owning that coin evolves is maybe massive because new users that nobody knows what their addresses are have to appear

and they have to get the coin. Set of outcomes is infinite. Maybe hard to put into a DLC-like format. But a bet is something where because the set of outcomes is finite, you can use that as a constraining mechanism to reduce trust. Yes, exactly. That's exactly the idea. So maybe the paper, looking back, of course, with the benefit of five years of hindsight, maybe the white paper was not aptly, you know, it was called smart contracts on Bitcoin, but it was actually just an if-then statement on Bitcoin. But it's still quite powerful. It's a, you know, kind of a low-level feature, but this, it does get into this idea of like an on-chain escrow or an on-chain kind of lockbox, which is, you know, kind of a low-level feature. It's a, you know, kind of a low-level feature, but this, it does get into this idea of an on-execrow, which is,

which is extremely powerful given the utility of Bitcoin. Right. So in our case where it's like, you know A&M, A and M lock their funds into a DLC, and there's an Oracle Olivia O, and the Oracle is the one that's going to resolve the bet. And A and M have already pre-signed the future outcomes that are possible with their funds.

What is the trust assumption on? on N, on O, on Olivia. Well, that was the other issue in this story is Olivia has to kind of somehow magically know all the outcomes of any kind of bet you might, or you have to pick on Olivia that happens to know what that, you know, outcome is, but how do you even measure an outcome? If I'm measuring what the temperature is, do I measure it?

This part of the house, that part of the house, am I outside? You know, you can have different real answers. from different contexts or different perspectives. So that's where we, that's why when we first started looking into this, we, you know, we actually reached out the chain link and just,

you know, they, and you know, kind of as a disclaimer, we have a close partnership with chain link. They were our first investor via a grant because they also got excited about this theoretical idea of Bitcoin oracles,

but you don't need chain link to use a DLC. It's a completely different. layer, but they've been very, you know, progressive and helpful. So we reached out to, you know, to ChainLink and we realized, well, chain link strength as the strength of many Oracle systems is you have a diverse set of parties reporting, quote, quote, truth. And they pick like a, you know, midpoint or some, you know, specific reference value. And then that is used. And then that kind of guided us to, well, this is really less, maybe less of a sports bed and more of a D5 or financial tool. because now you have these prices.

And so you can do things with Bitcoin that trigger based on certain prices. And so that kind of started moving us into defy. And then as we were doing that, I mean, a bunch of things happened last year. But, you know, one was sort of any kind of centralized or trusted party was, you know, not all of them, but many of them kind of failed and, you know, kind of spectacularly and losing a lot of money. So we felt that we're on the right track by enabling, you know, the more decentralization we can kind of build around this DLC concept, you know, the more people can benefit from it. And that's kind of, you know, go at what's what set us down the path we have gone.

So in this traditional bet example, is it the case that the Oracle, the Oracle cannot stain any of the funds because it's it's it's it the outcome of all the funds going to the oracle isn't in the pre-signed outcome set in the first place. So the Oracle cannot steal funds. Exactly. The worst the Oracle can do is say, you tell the users, well, I'm never going to publish this nons or this resolving information ever. Your funds are stuck. So you'd better give me half of your funds to make them unstuck. Otherwise, they always stay stuck and get zero.

So it can extort or by not being live, but it can't steal. That seems to be a trust model here. That's right. It's essentially like a form of smart contract risks or risks. But yeah, the Oracle can censor the transaction, which then pushed us, of course, in the direction of having multiple oracles, you know, where you have a threshold of, you know, five of seven or whatever. And that will then reduce it.

And of course, of course, the more oracles presumably, you know, getting the data from, you know, reliable sources, you know,

the more that risk drops. So now, like, okay, so in the beginning, it's kind of like one party that's, that's running the Oracle. And you're now moving into the space,

of okay not one party but seven or nine or eleven or however many parties that together behave as the oracle so that you can protect against this like liveness uh this this liveness problem so i so that that is that is something that's easy to understand but you're also using it to somehow bridge bitcoin over to ethereum which does not feel any obvious then obvious jump so how how does that work How does that piece hold? Yes. So, you know, it took us a while also to, sometimes with technology, and actually this often happens in, you know, universities and research labs, you have a basic invention, but the application is quite unclear.

So it took us also two years, basically, to kind of go in that direction. And it was a set of kind of aha moments collectively for our team. So the first aha moment was, well, if the liquidity doesn't exist between you and me doing this, then maybe it should be a human interacting with a protocol, like a defy protocol. A simple example of that is, gee, it would be great if I could just put my Bitcoin in Ave. Well, maybe I could use a DLC to kind of enable that in some form. So that was, you know, one step. But then, you know, another big aha moment was, and this one actually happened recently for us, is if you're locking in, you know, with a protocol, then you might want an outcome where there's like a quote-unquote liquidation where, you know, there's a second outcome where all the funds go to bond. You might want that, but you might not want that. Because, you know, in the case of, for example, and I'll get into kind of our rapid Bitcoin product, the LCBTC, like,

we don't want to be ever in a position where we could rug the protocol, you know, we could rock the Bitcoin, right? That would not really scale or that would not be useful. So then we realized, well, wait a moment, we actually need to, you know, can a person lock Bitcoin with themselves? Like, is that possible? And it turns out it is because the,

there was another feature of the DLC, which people had not really focused on where there's kind of a like a liquidation. payout address. So you can have, you know, Alice puts in, and obviously this would be that a one-sided DLC in terms of a depositor. So Alice puts in one Bitcoin. Bob doesn't put anything because it's just a protocol. And there's outcome one and outcome two.

But in the case of outcome two, the Bitcoin goes back to Alice. And so the Bitcoin goes back to Alice in both cases. And in that case, Bob is what we call our protocol wallet. where basically it's just an administrator for the DLC. And the reason you would want an administrator, well, a couple reasons, but one reason is, you know, if the user, like let's say the Bitcoin needs to go back to Alice, but either Alice or Bob need to execute on that attestation, we can't assume the user is going to be at their wallet, but the protocol wallet can just constantly execute these and just, you know, actually make the Bitcoin move. So now, you know, the user can basically lock into this kind of lockbox, this kind of on-chain escrow, where it's secured by Bitcoin, not by another chain, not by another validator set, whatever, but actual just secured by the Bitcoin chain.

And then, you know, you can have any kind of implementation, any kind of software determining, you know, what, basically what options are presented to the user and how, you know, what governs the unlock and what, you know, what data source this. Oracle kind of comes from. And then we also had one last kind of insight there is this thing that, this off-chain thing that publishes the attestation, it's actually not an Oracle if Chaining or Pith is the Oracle. And Chaining Fifth sends a signal to Ethereum. And Ethereum smart contract fires a signal or an event. And that goes to this thing, that what is this thing? And so we very creatively, because it publishes an attestation, we called it an attester, which is very, very simple but effective. And so the attester actually gets a signal from a smart contract chain or a smart contract and actually can check it on chain. That's another advantage of defy we realized is, you know,

you can actually check and validate on chain before you publish the attestation. So it takes out all the kind of, it reduces the, the, the, the issues that could go wrong with that tester. And basically, so then you have this DLC, a tester or a testers. And then we started building kind of around that. And it went from there. And then all of that led us to this idea of, you know, why don't we have a bridge or DLC, implement DLC as a way to bridge Bitcoin to ETH

using this system where you're locking it with yourself, your quote-unquote self-wrapping. It's a term I meet up. But you know, you're self-wrapping. You are the only person that can never get the deposits. And so you end up with this decentralized kind of escrow layer on Bitcoin, where instead of sending the Bitcoin to somebody's deposit address or to a custodian or whatever to some pool, you actually each individual deposit gets its own DLC.

And you have all these DLCs you can see on chain. They're all just, you know, UTXOs on chain. And then you can see the, all the, of the, if logic or the other smart contract logic on the other chain. And then you have this off-chain attester, which doesn't make any decisions. It's just translating a smart contract signal to Bitcoin settlement instructions. And that kind of gave us the architecture we have today. That sounds really cool because, like, it's an attester. It's not a single attester.

There are multiple attesters. It's a multi-sig of attesters. but the attestors could not steal my Bitcoin and I am locking the Bitcoin on my side and I'm just locking it by myself and then I'm getting something on Ethereum and I can use that Bitcoin like a normal ERC 20 token on Ethereum Yes

and then the Ethereum protocol emits some kind of signal when I want to bring that Bitcoin back and the attesters are just translating that signal. So that seems to be the advertised capabilities and they seem really awesome because the trust equation is like, okay, you are trusting X out of

Y of these attestals to be live. That seems to be the trust equation. And the capability you get is you can migrate Bitcoin off to Ethereum. And I presume if you can do for Ethereum, you can do for other ecosystems. Exactly, exactly. You can use it in the same way from

any ecosystem, which is quite powerful. Bitcoin L2s as well and anywhere. Right. So that feels very attractive. The mechanism behind it, I don't understand it. So maybe let's unpack that. Let's unpack that a little slowly, right? So maybe the first question is kind of for a bridge to be effective.

If I have Bitcoin and I send some Bitcoin to whatever thing on this side, it's a DLC, let's say one Bitcoin there, and it goes on to Ethereum, if you assume I'm going to do useful things on Ethereum, then it will always be the case that that Bitcoin could remain half with me and half of it might end up with something else, some other party. It could be protocol like compound or it could be, it could be maybe I made a payment on Ethereum or whatever So if that's going to happen

But on Bitcoin only I can someday recover the Bitcoin How can you have a fungible token on the Ethereum side when I am the only party that could recover it on the on the Bitcoin side Yep yep So that's a great That's a great point that we

When we started talking There's also another related challenge, which is like, which ETH protocol wants to manage a Bitcoin address? And so probably none of them are very few, not none, but very few. You know, so we came to, you know, we talked to partners like Maple and so on. And it's like, hey, you could have this and you could have, even in a case of a liquidation, and you could have this outcome to liquidation, go directly to you. But then you need, you know, a place to manage it and you have to do all this other infrastructure and regulatory, you know,

who knows what other implications that would have. And it wasn't like a really good pitch. People are not excited about it. And that's when we kind of, that kind of led us to a simpler mechanism where you're just locking with yourself. You literally just, you lock your Bitcoin and the fact that it is locked in this DLC,

which also kind of comes in with the built-in, like proof of reserves, because you can see on chain, is it locked, you know, open, is it locked, is it funded? Like, you can see, is it closed? You can see all that on chain on Bitcoin at any time. So, so basically it's just this like self-locking mechanism, which is like a little bit

of a, you know, you know, kind of twisted idea too to kind of wrap your head around because like we're all familiar with escrow providers and finance from you're buying a house, you put some money in escrow. And if the deal goes through, it goes through if not, you get it back. that's familiar, but here the escrow provider is actually the chain itself, the Bitcoin chain, which is kind of cool. And I neglected to mention that all of this was like support for this stuff was really added. A lot of it or some of it was added in Taproot, like Schnorr and something called PtLC. So taprood was also kind of needed to make this, you know, viable or feasible. But

basically, yeah, that's it. So basically in DLCBTC, you're, lock with yourself and the presence of this, the fact that it's locked, lets the bridge mint DLC, which you can use. And then when you're done using it, you can burn it. And the burning action unlocks the Bitcoin and sends it back to you. And, you know, in the case of a hack, if the hackers hack the attestors and they're publishing outcomes, then you just get your Bitcoin back earlier. Like it tanks the DLCBTC token, which is not great, so we don't want hacks.

You know, if like the hacker could kind of, the testers don't know who these parties are. So they could kind of randomly unlock parts of the reserve behind the LCBTC, which is not good. So security is still critical. But in the case of an attack, you get your Bitcoin back and that's it. And so you're pretty much, you know, you're not left holding the back, so to speak. or you're not left, neither us nor the, you know, nor another party could like drain the pool because there is no pool. And that's kind of the value out of, it's a very simple application of DLCs.

There's no, the second outcome basically doesn't really matter. It's just a locking mechanism secured by these protesters. So maybe one way of thinking about it is that, so in the beginning we are imagining this as like Alice that's kind of locking Bitcoin on one side. and then printing an ERC token on the other side. And Alice is kind of like a retail user. If you imagine Alice as not being a retail user, but rather as a market maker of some kind, right?

That this is an individual, like, I don't know, thousands of BTC, it's not an individual. It's a corporation with thousands of BTC in its treasury, like Michael Saylor's company, for example. Yeah, Michael, we'd love to talk to you. if you're listening. And so when they print

Ethereum on the other side they basically they could sort of create kind of like a fungible Bitcoin coin on the Ethereum side and they can basically have that coin

transfer and they are there to always make the other other side So if the coin ends up in the hands of a different person and that different person wants that coin back into Bitcoin, they could always go to this corporation and kind of get the Bitcoin back.

But then it becomes a trusted setup. Exactly, exactly. So you're exactly right. So the depositors in this are like if you're familiar with WBT merchants, they're like the LCBTC merchants. They are KYC'd that's also important for regulatory reasons. They're like companies, institutions that are exchanges, market makers, Bitcoin depositors, can be like Bitcoin miners, companies that hold Bitcoin,

you know, asset managers who hold clients Bitcoin. Like it can be any of those, you know, sources. But it's important that, you know, they set up these, you know, DLCs. And because there's sort of an issue with retail because it's kind of a, an unusual, maybe UX, people are used to like a permissionless, like peg in, peg out, send the Bitcoin, you know, you send in one, you get, you know, half out or whatever. This is not that, you know, this is clunkier. So you can have something we call like, quote, quote, DLC abandonment where, you know,

retail like, or somebody pegs in, maybe they lose their private key. They've abandoned that. That is not actually part of the reserve at that point. That is like fake, you know, kind of liquidity. and if the token drops and that could be an issue if there's a lot of that. So the depositors end up being merchants

and then retail can use DLCBTC as a safer you know, rap Bitcoin than other alternatives but then they should go to you know, they need to go to a centralized exchange to redeem it which is exactly what I do with WBT when I use it so

and other forms. So basically yeah, that ends up being the structure, the logical conclusion of this. Yeah, okay, so I actually know how to express the limitation of the DLC link protocol and express it. So the issue here is because if you imagine party A depositing something on Bitcoin and getting a DLC link Bitcoin on the other side,

and then the only party that can go back, is party A itself. And similarly, if you imagine that interaction for party B, there are two types of DLC link Bitcoin on the other side, one from party A and one from party B. And those two Bitcoins are not fully fungible

across each other because their origination DLC contracts have rights assigned to different parties. And those different parties have different liveless risks. The two Bitcoin on the other sides are not fungible with each other, and, ergo, they cannot be represented as the same ERC token. And that is a limitation of the protocol, but that limitation is coming in ultimately from the fact that Bitcoin doesn't have a smart contracting system.

Yeah, exactly. That's exactly right. And actually, not to further confuse this situation, but you can actually, when you log Bitcoin and a DLC, you can also represent it as an NFT. It's really a unique, you know, locking. And the NFT can have the address of the UTXO where it's locked. So, but the issue we ran into there, of course, is that, you know, DFI protocols aren't really set up for NFTFI. And even today, when people think of NFTs, 90 some percent of the time, they're thinking of, of, you know, pictures and stuff. And they're not yet thinking of it as a financial asset.

But I say that because developers who want to implement DLCs can implement them as NFTs. And you can also, you know, do different things with ordinals and that have an ordinal back that FD, but that's like, you know, nobody really, it's very, you know, it's like another mind watch. So what we found was in order to make this interoperable, it would need to be an ERC20, but it wouldn't have that limitation that you, you know, you described, where. if Alice, you know, refuses to peg out, you know, she doesn't have to, but then the liquidity is less. Or if Alice cannot peg out, maybe the, you know, because of just not losing the private keys, a simple example.

Or if Alice, you know, pegs in and then, you know, changes like swaps, the LZBTC for USDT and then the price shoots up. And now they have to spend a lot more to like peg out that they might not want to peg out because financially or economically. So it can increase that complexity. So the solution can only be just institutions where they have, you know, treasury management strategies and they have, you know, professional kind of risk managers involved. But for that audience, it's very powerful because now you have a way where you, where the counterparty risk is not, I cannot say it's zero, but it's reduced to a significant extent. It's trust minimized to a significant.

an extent over other options. And that's very powerful, you know, in the practical world we live in where there's all this, you know, Bitcoin that already exists and or all this liquidity and then more about coming in. It's, you know, it creates a powerful instrument or a way for, then that kind of takes us down the path of, you know, we can provide, you know, the user could use different financial instruments on, you know, EVM and options and hedging. and things like that, treasury management things, you know, through this mechanism with the, you know, and there's no, there's physically no way the Bitcoin can be stolen.

That's sort of the, if that's just the one headline we gain with this, then that's a big deal. So maybe like the way to picture the DLC protocol is when you imagine a party like, I don't know, Coinbase could be one, but it could also be like Bitcoin Swiss in Switzerland or Scyl or Scyl. about Bank on Switzerland or in the future, many, like these companies that are building, you know, market makers or things like that.

So these companies can essentially take their Bitcoin from the Bitcoin network, bridge them over to Ethereum. And this bridging process is quite trustless. They need to rely on the liveliness of these attestors, but they only need to rely that on a subset will remain live. And so with very low trust, they can bridge them over to Ethereum. And then these parties could be issuing fully fungible Bitcoin ERC20s on Ethereum. That in the end finally, retail users would likely use to basically do anything they want to do in Defi.

that is kind of like the end goal that your protocol could bring. Exactly, exactly. And the requirements for using this DLCBTC bridge can be kind of more simpler or more easily accessible. You know, we just have to qualify that as an institution. They have a way of safeguarding their private keys, you know, kind of standard stuff. And then they can, you know, and obviously with centralized exchanges, the good thing about Bitcoin with exchanges is there's a lot of it already. So they already have large amounts of Bitcoin. So it's not like listing a new, it is listing a new token. It's a synthetic token,

but it's an easier one from a lot of standpoint. And then, yeah, retail can then use it, you know, hedge funds, you know, can trade against it, whatever. You know, it can be used in finance in different ways. But, but you just know that the underlying security model is a decentralized security model and not centralized. And so there's less of that kind of counterparty risk. And then, yeah, you still need like the exchanges and stuff to participate. I would probably say that just is kind of an endemic to the financial system overall. Like if, you know, if we are on one exchange and they refuse to redeem, you know, maybe we should

have more exchanges, you know, we can kind of work with that. But that, with any kind of financial instrument, you know, at that point, it's like a an economic system. And the good news is there are a lot of economic, you know, systems like that that we can, you know, leverage and risk management processes and even we can look at insurance and things like that. Right. So presumably it should be possible to, for kind of this financial institution that's doing

this kind of bridging to have a system where they bridge from Bitcoin or to Ethereum and it lands directly in some kind of uniswop pool against USDC. So as a retain user, I could deposit USDC into the pool and get kind of BTC, that institutional BTC directly into a transaction and then I can do things with that. So kind of like that flow, that handover to the user is kind of like made really easy. but the one thing that does that seems pertinent here is do you sense that there is like

there is like an argument here that you have one blockchain Bitcoin and then you have another blockchain Bitcoin Ethereum and if a professional company is moving stuff from this chain to that chain that they are a money transmitter

and if they are a money transmitter then they are subject to various forms of regulation in the United States, and one of which is to actually get licenses in 50 states, and that being a difficult part of your protocol getting traction? It's a great question, and we worried about this a lot earlier this year until we realized that innovation I mentioned around that the payout address of this, like all the payout addresses basically can be set to the depositor. So if there's no scenario in which we can ever receive funds, and the, you know, the funds

are all directed by immutable smart contracts running on, you know, various blockchains. And we also, I mean, I think the, the, with any kind of, of course, you know, crypto or financial protocol, there's some risk, you know, this is a synthetic asset. It has risks. But the, because the risk profile is really the attester. So, you know, there isn't anything really on the Bitcoin side that would constitute money transmission. And then the attester is just, you know, running software we made to execute instructions. It gets from a protocol that the user has chosen to trust.

And so the user has self-wrap and chosen a protocol. And that protocol is directing, you know, our node operator partners, you know, the nodes running there to kind of fire these instructions. we are completely just a software provider in that definition. There's, you know, I'm not a lawyer, so I can't say zero, but there's near zero. Or like maybe on the list of like on the crypto hit list, we're at dead bottom. Most likely. So that seemed, you know, so then I can sleep, you know, well at night. Because I'm in New York and we take, you know, regulation seriously,

especially because our, you know, our target market, our institutional Bitcoin depositors. of course. So we are reaching out to the CFTC to, you know, kind of have conversations and get their initial feedback, that kind of thing. But on the other hand, you know, we kind of, even just looking at Chainlink, I believe Chainlink as the financial Oracle provider is not subject to CFTC or SEC, you know, regulation for that service. So our tester, which doesn't even do that much, probably is quite safe. But we are, you know, proactively. There could be things we don't know, as engineers, so we are reaching after the CFTC. Cool.

So let's talk about kind of the environment around this technology. What does your company look like and how is it financed? And yeah, and how are you developing this protocol? Yeah, yeah. So we, you know, I guess I would characterize our company as we have two focus areas. And we have had this from day one. One is the commercial business where we are, you know, selling this, this, we're pitching the idea of, you know, Bitcoin holders, institution of Bitcoin holders, gaining yield or buying, you know, financial, you know, derivatives, options, hedging products, or or taking loans on their Bitcoin in a safer way. And we're, you know, we're presenting that, you know, we're presenting the options. Obviously, we're not a broker dealer, so we're not like doing loans and stuff. But, but we can just. showed that DLCBT gets them a step closer to working with these protocols they want to work

with in a safer way. So that's the commercial side. And that, you know, we also take a mint, you know, fees on mint and burn. So when people, you know, peg in or peg out, we take a fee in Bitcoin. So that's, you know, that's our business model. And then the, we then have the community side where we just support the DLC community kind of honoring short bits and all the stuff. that they did to set it up and all the other participants in the DLC community. Right now it's atomic finance, 10-10-1, lava. There's like a few of these crew that have been around for years, Tibo, a crypto garage, like, and they've been just working on this.

And so we want to get more people building on DLCs. We want to get more chains, obviously, you know, on the community side. I want to focus on every chain. Bitcoin L2s, you know, can use this to enhance their, they're peg in and peg out into their ecosystem. So we partner with them. Pretty much anyone, you know, ordinals, you know,

Bruins, BRC 20s, you know, whatever you might want to lock in a DLC, you know, to wrap it to get a representation on another chain so it can do more advanced stuff like auctions, or lending, you know, we want to support all of that.

There's also some work that's been done on DLCs on lightnings, so it can have taproot acid. So we're just kind of a just a general advocate of DLCs there. And then we can also leverage the infrastructure we've developed to support the commercial side and make that available for developers at obviously a highly subsidized cost. So you can access our tester network. There's other things we've built too, like these CETs and the original design, they were just stored in the Alice and Bob's

wallets so we have, you know, other storage to provide redundancy so the CETs don't get lost. You know, Bitcoin wallet integrations is actually probably most of our, you know, work is in order to actually do this DLC, the Bitcoin wallet, you can use any, you know, ERC 20 wallet. It doesn't matter. Just it's an ERC 20. It's fine. But the Bitcoin wallet has to have a feature, has to have a capability to lock this DLC to actually create the DLC and do these signatures. That requires something called

adapter signatures. So anyway, we build, you know, the DLC support using all basically all open source stuff and stuff that we developed to make it kind of easier to build it. But we have sort of like a wallet SDK, if you will, for for plugging in. So we have plugged that into leather wallet, which used to be called Hero and X-Vers. And now we are hoping to talk to, you know, ledger and okayX wallet and so on to to just have kind of widespread adoption of this dLC signing capability so that's also a you know big focus that then benefits everyone who wants to you know use dLCs so i think we made some good progress with those two wallets over two over 200,000 people use either leather or exverse so that's a good start and then obviously once for our customer

base once we're at ledger and treasler and any kind of hardware wallet, then, you know, then, then there's institutions can create DLCs from there too. So that's a big goal of ours and the next year of us. So what's the current status of the protocol and the, so let's start with the protocol first, the tester network and the code that you need on both sides, the Thethev site and the Bitcoin side. What's seriously? Yep, yep, the code is, so we're live on TestNet last Saturday, actually. we demoed the DLCBTBTC bridge to ABCD Capital on investors and OKX Ventures.

They had a Bitcoin hackathon. And so I just yesterday posted the TestNet demo on our YouTube channel. So it's the first time it was shown publicly and the second time I had seen it. So anyway, we've got that in TestNet. And then in, so for the attester network, we've got a couple of verbal, commits from the Republic and all nodes. And this week through you, I met Corus 1. So we would love to have just top tier attestors.

We have, when we launch, we're just going to have six attesters and us as the seven. So, you know, six individual attestation or sort of node operator companies. And the main job of the attestor is just to safeguard the private key. That's the most important thing. So that's why we're kind of, you know, reducing risk. by having six different ones and obviously for a degree of social

resistance. In the future we might have a token that lets anyone run in a tester and stake the token and that would be a broader set of decentralization. We're implementing also something called well we're implementing an MPC solution potentially one called

Frost but it might just be a different MPC to where like an affid tester has opened a DLC or participated in the opening of a DLC and has to leave the network, maybe the company stops doing this or go bankrupt or something happens, then another tester could take its place from another provider and we could heal the network. So that's the last feature we need to implement. And we have already done once a smart contract audit through coin fabric. Now we are selecting the second smart contract

audit firm. So all of that together, we should be ready to launch. Oh, we're also getting verbal commits on the initial set of Bitcoin depositors for our initial set of merchants. We have some investors who are, you know, who have been early movers in Bitcoin, like Bitcoin miners, like a water drip capital in Asia and some other bit. We have another Bitcoin whale who is invested. So basically getting some Bitcoin lined up. So we have some initial liquidity, you know, picking an out to all of that. We will launch on in March.

So I think we're on track to hit the March launch date. and then, you know, we'll start creating a curve pool and maybe other dexes and having at least one centralized exchange and then having at least a market maker and kind of build up the ecosystem from there. Really cool. So I'm actually curious that like there's a space of a lot of protocols or a lot of companies that have built Bitcoin bridges in the past. Who do you respect the most in these alternatives?

Yeah, you know, great question. I mean, just in the space of Bitcoin bridges, I have to really say hats off to threshold, TBTC. You know, that team there, I was fortunate to work with someone from there for a few months, just even helping think through this project. And I think they have a different system, something based on a Keep Network or Keeps,

which was, I think, invented like four or five, years ago or developed, but they're really in terms of, you know, their goal of having Bitcoin in ETH for Defi in a Safeway, I think that vision, we share that vision. So we're really big fans of what they've done. And they also have done a lot of really smart engineering and and so on. So it's really, it's really cool. But basically, you know, we, I mean, we try to be respectful to everyone, but we, we love people who, you know, don't see it, don't see blockchains as sort of religions. It can kind of go down that way. And of course, everyone, if you are invested, I mean, one of the goals is, of course, to have

ownership. And when you have ownership in something, of course, you have some human biases where you favor that over other things that you don't know or are less familiar with. But it should not elevate to the level of religions where, you know, they're warring or so on. You know, So anyone who, you know, wants to have Bitcoin in ETH, Defi or Bitcoin in Solana or any other chain defy, or, you know, DeFi rebuilt on Bitcoin in different ways, also great. You know, anyone who's kind of, you know, is open-minded to two or more things. We love those kind of interdisciplinary people. And so we also like to talk to developers a lot and people who are, you know,

close to the engineering behind this stuff because, I mean, I've sort of simplified a lot of, you know, math and so on. Some of it I understand. Some of it I don't. But there's a lot of, you know, the devil's in the details with the engineering. So, you know, our hope is that by giving DLC capability

and infrastructure to a lot of smart people, they'll come up with more unique and more interesting solutions that we haven't thought of. So we see DLCs as, as not, it's not a layer two or anything, but it's like a technology that people can build on. And there's a lot of like building on Bitcoin interest that's going on. So I think we should, you know, really look at building on DLCs. And there are, as even in this call, we mentioned several different parameters that are very impactful

that you can choose on how you design the application. So you can have different applications. And that's great. We can support also sports betting. Not to poo with that. That's a big industry in the real world. So that's one thing. Or, you know, there's so many others that we've heard,

especially when it comes to like ordinals and the new types of assets you can put in. So anyone who's building and is open-minded, you know, we respectfully. Cool. So if people are interested to connect to you or to the DLC link work, where should they go? Yeah. I would start with, you know, started our website, dLC. dot link and kind of an all inch to the first company we partnered with chain link but again not strictly affiliated from a technological standpoint although we respect them tremendously we are looking at chainling

proof of reserves we're looking at chaining CCIP so there's you know there's there's a lot of you know partnership there but anyways start with dLC link our docs are their docks dot dLC dot link also i usually recommend our videos. We have a video on our own page. It's one minute long. It explains it. We have some blog posts around, you know, how does this at this station work in detail? You know, what are things you need to know about the testers? What are things you can do? Like advanced features, this enables for ordinals, people building with ordinals or other Bitcoin-based assets. You know, we try to just have, you know, content that describes it. We're also now making Chinese language, Mandarin language content so that because now we're working with diverse audiences

in the future we should have Spanish and other languages as well and yeah we're just you know drop us a line there's a chat bot you can join our Discord I'd be totally remiss if I did mention that join our Discord the link is on the bottom of website there's also a a DLC community telegram for engineers specifically interested in DLCs we'll put that somewhere on the site it's not there to but we'll get it added. And yeah, just, you know, engage with us, ask us questions, come to our Discord, ask questions, and we're here to help.

Cool. It was great to chat with you, Oki, and I wish you the best of luck for the upcoming launch. Thank you so much. I'm glad we got a chance to go through on a technical level because, as you can see, this is like a set of meandering, you know, startup discoveries over two years. I appreciate you taking the time

to kind of walk through the full picture. Cool. And thank you to our listeners for tuning in to the episode. I'll catch you in the next one. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud,

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