Unchained - Could dlcBTC Resolve the Issues With Wrapped Bitcoin? - Ep. 690

Episode Date: August 16, 2024

In this episode, Aki Balogh, CEO of dlcBTC, explores how Discreet Log Contracts (DLC) can change how Bitcoin works in DeFi by creating a self-sovereign Wrapped Bitcoin. He delves into the mechanics of dlcBTC, its security features, and how it aims to be more decentralized than existing Wrapped Bitcoin solutions like WBTC. Aki also shares future plans for dlcBTC, including integration with Bitcoin Layer 2 solutions and expansion to various blockchain ecosystems. Show highlights: 00:00 Intro 01:48 Aki’s background and how he got into crypto 04:14 What Discreet Log Contracts (DLC) are and why they are relevant for Bitcoin 07:56 How dlcBTC leverages these types of contracts to build a self-sovereign Wrapped Bitcoin and the differences with the current WBTC 15:41 Aki’s reaction to the news that WBTC will soon be handled by a joint venture between BitGo, Justin Sun and the Tron ecosystem 19:27 The role of attesters in making dlcBTC secure 23:26 How redemptions work in this kind of setup 27:31 Whether dlcBTC is more decentralized than WBTC  28:15 How many attesters the protocol should have to make it more safe and secure 30:05 How dlcBTC, the company, makes money with this product 31:11 Whether dlcBTC will be used in Bitcoin L2s, not just in the Ethereum ecosystem 34:47 What the future plans are for dlcBTC Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! iTrustCapital Polkadot Token 2049 Guest Aki Balogh, CEO of dlcBTC. Learn more about your ad choices. Visit megaphone.fm/adchoices

And it's done great. But everybody who uses WBTC, the traders who trade it, the retail who holds it, everybody knows that it has sort of one kind of design flaw. Hey, everyone, Laura here. We've recorded this show in advance since I was headed out on vacation. And of course, afterward, news regarding WBTC broke. That's highly relevant to the show. I did manage to get a written answer from Aki about the news,

which we were able to insert ahead of publication. So just FYI, the news about WBTCC, is not referenced to anywhere else except in that part of the recording. And now on to the show. Hi, everyone. Welcome to Unchained, your no hate resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started coming crypto nine years ago and as the senior editor at Forbes was the first MainTrain meter porter to cover cryptocurrency full-time. This is the August 16th, 2024 episode of Unchained. With I Trust Capital, you can buy and sell crypto and in a tax advantage retirement account.

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slash ecosystem slash community. Get ready for the world's largest crypto event, token 2049 Singapore, from September 18th to 19th to 9th, Join over 300 speakers and 20,000 attendees. Visit token249.com for 15% off with Code Unchained. Today's guest is Aki Balog, co-founder and CEO of DLCBTC. Welcome, Aki.

Hey, thanks for having me. So your company implements something called discrete log contracts or DLCs for Bitcoin. And it's something that's similar to wrapped Bitcoin. It's very exciting. and I wanted to just hear your story of how you got into crypto and how you came to found DLCPTC. Yeah, absolutely. I guess just to keep it short, I was born in Hungary, but grew up in Boston and Michigan. I've been writing code for almost 30 years.

I'm 39, so I can say that. I was a management consultant. I was a VC in Boston in 2011. So I was looking at AI, distributed databases, kind of the big data, Hadoop movement. I actually left VC to work at a database company for two years, and then I started my own company, which was an AI marketing optimization company. I did that for eight years, raised $15 million, did the whole thing.

And I heard about Bitcoin in 2011. Regrettably, I didn't kind of focus in then. I heard about ETH pretty early too. I still regrettably didn't focus. So I thought, you know what? I missed a big pump, but hey, next best time is now. There's still a lot to be built. And I should also add my father's a scientist.

That's why we came from Hungary to the U.S. And he's always created basic inventions. He's invented new science. I've made it my career to do applied inventions. So I take science, even for my last one, I take science that already existed, adapted it, built it into an engineered system to solve a business problem, and made a startup around it, raised venture. That's what I did last time.

That's what I wanted to do this time. obviously I'm not a cryptographer. I'm definitely not a Bitcoin OG. I wish I were, but I'm not. So, you know, I was looking at what sort of something novel that could be done in the Bitcoin space. Why Bitcoin, well, you know, when I came to the space in 2021, I'm like, well, this makes sense. It's stable. There's a tremendous security, you know, foundation, et cetera.

So I wanted to do something new in the space. And basically a friend of mine told me about DLCs. I'm like, what is that? And then I met the DLC community, learned up on it, and two plus years later, here we are with DLCBTC. But I think half of what we do is I love to tell people about DLCs because I think it's a pretty undervalued part of the whole Bitcoin, building on Bitcoin movement.

And so, yeah, explain what they are and what problem you think they solve for Bitcoin. Yeah, yeah. So I like to say, I think when I saw at the conference, I'm like, surprise, surprise, there are some type of smart contracts on Bitcoin. They're not exactly. He's referencing, we met at a conference in person. But anyway, keep going. Yeah, it's kind of like, shocker, there is something programmable in Bitcoin.

It doesn't use off codes. It's called a discrete log contract. It was actually invented at MIT six years ago by the creator of the Lightning Network, Tadj, Dryja. We were just on a panel with Tadj in Nashville the other day. And so before he published a lightning white paper, he published the DLC white paper. And the goal of the DLCs is to have some sort of programmable kind of logic on Bitcoin. And I would say, and the white paper is great.

It's really interesting. But I would say the easiest way to explain it is a DLC is like an if-then statement on Bitcoin. And Tadj actually used the Schnur signature formula, which then-Shnors. support for Schnoor was added three years ago with Taproot. So basically three years ago, when the Bitcoin mining network upgraded to Taproot, DLCs actually became a thing you could do on Bitcoin. And they're there, they're permissionless, anyone can build on them. But so what is a DLC?

So basically, imagine you have like Alice and Bob and they want to, and this is kind of the classic sports bet example pointed out in the white paper. like let's see, I have Alice and Bob. They both have Bitcoin. They want to make a sports bet. They need to get the result, like who won the game from somewhere. So they find an Oracle, Oracle just meaning any entity that sends off-chain data to Bitcoin blockchain, they agree on an Oracle, and that Oracle kind of determines who won the game. So how do they do this on Bitcoin? Well, Alice and Bob both agreed to a set of potential conditional outcomes. Like, let's say one outcome is Alice wins, takes all the Bitcoin, maybe another outcome

is Bob wins, maybe a third outcome is it's a tie and they split it. So they agree to the conditional outcomes. And when they deposit their Bitcoin, they pre-sign all of these outcomes on the blockchain. So in that transaction, the Oracle, and it gets a little, I don't want to get too deep. And also, I'm not a mathematician, but the Oracle does not know who the parties are, but the Oracle contributes to these pre-signed signatures. And then later, when the outcome is known, the Oracle just publishes a number corresponding to, it's a number that connects to one of these pre-signed outcomes.

And then using that last piece of data, either Alice or Bob can execute the full Bitcoin transaction and claim the Bitcoin. Obviously, the winner kind of has more of an incentive to. But basically, that's it. So it's like a pre-signed if-then statement, and the Oracle can be anything. And so that's the classic example. And I have to point out that the first kind of pioneers in DLCs were a company called Shortbitts, Chris Stewart and Nadav Cohen, who are brilliant Bitcoin developers.

They saw the white paper. They implemented it. They created like a DLC community. And they actually implemented the sports bed type scenario. and they had like a DLC Oracle running. And so when I came to the space in 2021, Chris was still doing kind of these monthly calls for the DLC community. Okay.

And so how does your company, DLC, BTC, how are you implementing these types of contracts? Because, yeah, you have a bunch of business deals going also to make this happen. Yeah, yeah. So we did not go down the sports bet route. So when we came to this space, we meaning my co-founder, Jesse and I, we looked at it and we're like, this is really cool, but I don't think it's for a sports bet because people are not doing a lot of sport.

I think that was like an illustrative example in the white paper, but there must be a better kind of use for this. And we started by looking at the Oracle and we were quite fortunate when we started DLCLink, which is sort of the parent company of DLCBTC. When we started that in October 2021, we quickly on met ChainLink. And ChainLink actually gave us a grant to research, quote. quote-unquote Bitcoin oracles. Because we're like, cool, what is the Oracle that can plug into Bitcoin? And of course, Chainlink as a market leader in Oracle's, you know, that was a good kind of first step. And kind of going through the process, and there were a lot of twists and turns.

But going through the process, we realized that it really does come down to the Oracle. And the Oracle is like in our system, which, so I guess I should introduce it, we make DLCBTC a safer rap Bitcoin. So we're enabling Bitcoin to be wrapped to different chains like Ethereum. And so if you want to wrap Bitcoin to Ethereum, what's the one thing we know about you? Well, we know that you've chosen to trust Ethereum. If you don't trust Ethereum, you want to wrap the Solana. Whatever chain you want to wrap to, that should be the Oracle. So the entire Ethereum blockchain should be the off-chain input into the DLC.

And so that's a very different type of DLC than the other teams are doing. But basically, and so kind of that was one big aha moment. And then the other big aha moment was like, okay, well, so we got Alice and Bob. But if Alice is wrapping their Bitcoin to Eath, who's Bob? And we're like, oh, there is no Bob. Bob should not, only Alice should be able to get the Bitcoin. And that's when we came up with the term self-wrapping. So using the DLC mechanism.

Alice can lock a Bitcoin with herself by moving it into a multi-sig, a special multi-sig, this DLC, that can only pay out to Alice. And so Alice can be 100% sure that it's a theft-proof design. Only Alice can never get the Bitcoin. But when they put the Bitcoin into a lock state, that means DLCBTC, which is the ERC 20 that can be used in finance and stuff. Yeah, there's something about this that almost reminds me a little bit of make or doubt in a way. But so why don't you then explain just because we do currently have something that's somewhat similar, but obviously quite different, which is wrapped Bitcoin that can be used in Defi. So just talk a little bit about how your setup differs from Rap Bitcoin.

Yeah, yeah. So this is where it gets really interesting because it's something that is a big problem for traders today. So rapid coin WBTC was created in a collaboration with BitGo, WN, and Kiber four years ago. It was a revolutionary invention at the time. It enabled Bitcoin to be used in defy. You could invest it to earn a yield. You could do loans on it in ABE. And WBTC has been really phenomenally successful.

It's a top 15 token in crypto. And it's done great. But everybody who uses WBTC, the traders who trade it, the retail who holds it, Everybody knows that it has sort of one kind of design flaw, I would say, or maybe not even flaw, but they had to, back in the day, it was just sort of like, let's make this work. And they chose one custodian, BitGo. And so basically the way WBT works, it's actually a really simple system. You have a set of financial institutions called merchants. So kind of like, and maybe to give an analogy, people usually have not heard of the merchant. merchant system. But if you think of like USDC where Silicon Valley Bank, Wells Fargo, you know, other banks put up dollars to mint USC and then retail can use USC. WBT has the same

exact system. They're just called merchants. It's the Amber Group, Kobo, Falcon X, Galaxy. They get, they go through like an onboarding process. They get whitelisted by the WBT Dow. And they also get BitGo custody accounts. And the white list enables them to send Bitcoin to BitGo. Bitgo puts it in their vault in Nebraska or wherever, North Dakota or whatever, and they hold it there. And then in return, they give them this WBT, ERC 20 that can be used. And then the merchants resell that token. So basically, they are doing OTC. So like, if you want to trade on WBT or if you are in exchange and you want to acquire WBT, you have to buy it from this set of merchants. They are distributors. And that's how WBT is produced.

But meanwhile, all the Bitcoin is in one place at Bitcoin. And so that is the, there's a couple of disadvantages of that or a couple of risks associated with that. One is, of course, that, you know, it's in one place, which is not kind of the scalable goal of Bitcoin. There's a trillion dollars of Bitcoin. Would Bitcoin have a trillion in their vault? I don't know if it would scale that way. BitGo is a U.S. trust company. they are subject to the laws of the U.S.

Laws are, you know, I'm not political, but the laws can change, I guess, based on various things that might come to pass. There's that. There isn't any deposit insurance in crypto. They do have some insurance, but it's not going to pay out. Like if there's a loss event,

it might not pay out, you know, all the deposits. So that Bitcoin, you know, basically it's some form of like, not your keys, not your Bitcoin. If, you know, Galaxy has, sent their Bitcoin to BitGo, then it's in Bitcoin's custody. It's not in their custody. So that's a problem. Because, you know, if you're retail, and there's a lot of, you know, and we'll talk about bridges and Bitcoin Alto's and stuff. But if you have a small amount

of Bitcoin, you know, maybe you're not so concerned. You know, you can bridge it, you can wrap it, whatever. But if you have a large amount of Bitcoin and something happens, you know, it could be very serious consequences. And just, you know, even systemically looking at the kind of ecosystem, WBT is everywhere. It's in a lot of places. And so if there were to, if something were to happen, it could have, you know, severe consequences for the entire industry. So that kind of gives, you know, especially larger traders pause. And so, you know, to kind of, you know, get to the point, that's what we have decentralized with the LCPTC.

using this DLC mechanism, Alice locks with Alice. So we have the same merchants, Amber Group, you know, Kobo. We're talking to the same merchants, same financial institutions. But in our system, they don't send Bitcoin to us or to anyone. They lock it with themselves using this mechanism. And so they use our software to basically self-wrap it. And then that means DRC20. And then they can do, you know, go about their business and make money as they normally do.

All right. So in a moment, we're going to talk. a little bit more about how DLCBTC works, but first a quick word from the sponsors who make this show possible. Hey, everyone. So after we recorded on August 9th, Bicco announced plans to transfer control of WBTC to a joint venture with BIC Global, a crypto custody platform that is a strategic partnership between Bitco, Justin Sun, and the Tron ecosystem. This prompted Maker Dow Advisor BA labs to propose that Maker cut its WBTC exposure to zero in its core vaults, disable WTC borrowing, and bring loan to value ratio on Sparkland down to zero. The proposal said that previous

projects under Sun had resulted in, quote, market deterioration in operational processes and transparency, including suspension of real-time proof of reserves and several significant defects caused by interruptions in redemption service. The report continues, quote, other Sun-affiliated projects show worrying signs of possible misappropriation, such as STUSDT, a sun-controlled RWA project that purports to hold reserve of U.S. Treasury bills, but has not provided clear audits or evidence that the backing exists. When I asked Aki for his take on the drama, he said, quote, WVTC was a revolutionary invention four years ago, as it enabled BTC to be used in defy, unlocking major liquidity and utility. Through partnerships with Ave, Maker, and other protocols, WBTC grew to become a top 15 token, with over $10 billion in total value locked.

However, WBTC has one major vulnerability. It relies on a central custodian Bicco. Bicco has a stellar reputation, but the lack of on-chain transparency has always been a concern. Bicco is a U.S. trust company, which has made it harder for WBTC to service partners in Asia and elsewhere. Mike Belshey, CEO of Bicco, has confirmed that Bixie, Bik Global, a Hong Kong-based public company in which Sun is a major shareholder, will hold two of three keys in the multi-sig securing the Bitcoin backing. Aki then quoted some of the concerns that had been called out by B.A. Labs about Justin Sun

and Tron. He goes on, quote, this created a lively discussion across Twitter and the Maker Forum to find other Bitcoin derivative projects who could fill the gap caused by a potential WBT listing. thresholds TBTC and DLC links DLCBT showcased the advantages of their projects, and a few days later, Coinbase teased CBBT, a centralized Bitcoin offering on Twitter. He then concludes, My Take. We believe that DLCBTC provides an ideal replacement to WBT as funds are held in self-custody by each merchant, and it does not rely on a bridge custody mechanism like TBT, Bitcoin L2s, or other alternatives.

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Token 249 Singapore, September 18th to 19th. Anatoly from Salana, Kyle Samani, Imad Mostock, and 300 others will hit the stage for an immersive festival experience ahead of the Formula 1 Grand Prix weekend. Singapore will transform into a buzzing crypto hub from September 16th to 22nd, with over 500 side events taking over the city. Visit token 2049.com. for 15% off tickets with the code unchained. Link in the description. Back to my conversation with Aki. Tell us about this setup for DLCBT.

How many testers do you have? How does that multi-sig work? How many merchants do you have? What different chains are you on, et cetera? Yeah, yeah, totally. And I'm glad you brought up a testers. I forgot to mention that earlier. So Bitcoin cannot talk to Eith, of course.

So in order to have ETH be the, the Oracle and the DLC, we need a way to get the signal to go from Bitcoin to ETH. And so in the DLC, so usually like when you launch a chain, you have node operators and you're like standing up nodes and they're validators and like there's all that. But in this case, it's just Bitcoin and Eith. We're not a chain. We're not adding any of that. So we don't have validators.

So we have, but we do have something in the middle. We call it an attester. Just for the simple reason that is publishing. what's called a DLC at the station. So basically we have 15 node operators like hash key cloud, Everest, P-2-P, etc.

And all they do is they run a Bitcoin node and an eth node. And then they have a small server where they just custody a Bitcoin private key that's running our software. And that private key cannot receive Bitcoin but is used for

message passing. And so why 15? Well, if you only had want a tester, they can't steal the Bitcoin, but they could do like a ransom attack on the deposit. They could censor the unlock and refuse to un-mint. And so we do need to decentralize these DLC or these attestors to some extent. So we have 15 of them. And a threshold of 10 can publish the message to either mint DLCBTC or burn it. And then the great thing about this is anyone can verify that. Anyone who runs a Bitcoin and ETH node can verify it. So in our design, we have chainling proof of reserve wrapped around it. Basically,

when the signal comes through, they do another check and they say, yep, it's, you know, that UTXO is funded on Bitcoin or, yep, I see the burn on Eith. And that's right. So we can have any kind of, you know, it's a very secure system in that sense because we're not adding any chains or any kind of unproven things or any kind of moving pieces. So those are the attestors. And basically, yeah, so we've got, you know, we're onboarding merchants, just like BitGo system. We have, right now we have one merchant fully onboarded Amber Group. And we're bringing on the next five IMC, hash QOTC, talking to Cumberland, just kind of some of the big, you know, the big trading houses. We work with all kinds of financial institutions, market makers,

you know, liquidity providers, asset managers, really interesting for corporate treasuries, because this lets them self-wrap their Bitcoin instead of, you know, using a custodian or a bridge. You know, they don't have to send it anywhere. So that's quite unique. And they can also redeem it very quickly. They can, you know, if you, you can mint and burn DLCBTC in an hour. It's just six Bitcoin block confirmations. It's a fully automated system. So if you see an opportunity, you can go in quick. If you, you know, the market's dumping, you can come back out quick. It's just a really, you know, simple design.

So we're basically setting up this new asset. We have launched on Arbitrum. We're the first native minted rapid coin on Arbitrum. Previously, they had custodied, bridged WBTC, and they had bridged TBTC. So now you can just, Amber can native wrap to Arb. Now we're soon going to be on base. I've also been cleared by Ripple's marketing team to tell you we're going to be on Ripple. We're going to be the first wrap Bitcoin on XRPL and do stuff there.

So we're basically just bringing DLCBT to any chain with DFI where Bitcoiners might want to take advantage of yields there. So just something I have to understand about the redemption process is if you're saying that this person, Alice, is creating their DLC, BTC. if they're trading it in Defi, then somebody else ends up with a DLCBT who didn't originally mint that DLC BTC. So how does the redemption work if they want to obtain the Bitcoin from it? Yeah, great question. And this is why we went down the same path. And this is why retail cannot mint it directly.

Like a lot of the building on Bitcoin stuff, you know, you've got great chains like Bitlayer and, you know, whatever. you can just send your Bitcoin, TBT, threshold, send your Bitcoin, you know, permissionlessly, anonymously to their bridge. They lock it, they hold it in, you know, a set of nodes, and then they give you this other token or they mint this other token. That is great for, you know, retail use, I would argue. But then you've bridged it, right?

Like, you're not on Bitcoin's security. You've sent it to either BitLayer's nodes or TBTC's nodes. And there's just a finite number of nodes. I think TBTC has like 60 nodes that do the custody and 100-something nodes that do other stuff. So like bridging, like that system works. Like retail minting works for bridging, but it does not work in this system. In this system, we rely on this federated set of merchants like the Amber Group and Galaxy. And so Amber, when they're putting up their own Bitcoin off their balance sheets or their clients Bitcoin,

they lock that Bitcoin and that basically their goal is to ensure redemptions. So they are distributors. So let's say like Amber and Galaxy and so on, they each put 50, you know, they self-wrap 50 Bitcoin each. You've got 100 Bitcoin. They put it on some dexes, some centralized exchanges, retail grabs it there, retail users, maybe retail swaps their Bitcoin for DLC or some other token like ETH for DLCBTC, whatever. they put it into Ave, they do a loan, it gets liquidated. The liquidator gets custody of the DLCBTC.

The liquidator can go back out through the exchanges and through Amber ultimately. So the merchants are the backers of the system, just like with WBT or USDC. The difference is that each merchant has custody of their Bitcoin versus there being another kind of layer of just having like Bitcoin. And it's basically the WBTC merchant system without a BitGo centralized custody. Okay. But each of them is acting as their own centralized custody? Yeah, yeah.

That's right. So like Amber, you know, and our merchants can pick whichever, usually they want a hardware wallet or an MPC custodian. So they lock their Bitcoin in, you know, the custody solution of their choice. Usually it's never a software wallet. It's hardware or MPC. So they locked a Bitcoin there to produce the LCBTC. And so kind of like, why might Amber do that?

Like, why would they take, you know, whatever 50 Bitcoin and lock it? There's an opportunity cost or carrying cost of that. Well, they would do it when they can make money with it. So they do OTC trades. They do ARB so they can arb the price on different dexes. They can mint and burn to, you know, arb the price through minting and burning. If you're a protocol and you want to acquire DLCBTC, you have to pay Amber their fee, their OTC fee. So that's basically the kind of distributor business.

I'll give you a really easy example that kind of clicks for people. Think of us like, we're Coca-Cola. We just make syrup. You cannot go to Coca-Cola and buy the syrup. You can't drink it. But Coca-Cola sells syrup to different bottling companies. They put it in bottles. They sell it to Walmart.

Retail gets it at Walmart. This is the same system. Okay. So in terms of like the decentralization, basically, it's only more decentralized than wrapped Bitcoin in a sense that there isn't necessarily a single point of failure. Is that? That is correct.

Yeah, exactly. I would say the alternative approaches is either using a custodian like Bitcoin or using a bridge where you have different nodes, but then you're not on. Bitcoin security. In this case, for Amber, it's your key is your Bitcoin. For the retail holders, of course, their risk, when you're holding, when you and I are holding the LCBTC, our risk is basically a composite of the underlying counterparty risk of all the merchants, just like USC. Okay. And then so for the attestors, you said now you're moving to a model where there's going to be 15. Do you have like an ideal number that you would want to have?

It's a great question. We haven't found any kind of math to substantiate this. I talked to Ethan Bachman, who co-founded Tendermint and Cosmos, and I'm like, what do you think? He's like, I don't know, 21, 15, something like there. So there's a certain number of attestors because the validator set is ETH. So you have, I don't know, thousands or tens of thousands of ETH validator, however many there are, the signal is being validated by ETH already or Arbitrum or whatever chain you're on. So we don't have to like stand up a new chain.

It's just like how many attesters reduce the possibility of a ransom attack or the, you know, of collusion, right? So if there's one attester or three attesters, let's say the three collude, let's say, I'll give you an example. Like Amber's put in, you know, self-wrap 50 Bitcoin gets 50 DLCBTC. They burn it. There's only three attesters. they all collude, and they prevent the unlock. They don't send that signal to the DLC. Then Amber can't get their Bitcoin back.

Then the three attestors could do like a ransom attack and basically just demand a bribe. That's what we want to avoid by having 15. There's other ways to decentralize it, just standard kind of ways. We're going to be launching at some point a token where the attestors are staking the DLC token and earning fees. so that gives them a financial incentive, also not to collude. But yeah, there's only so many that you need for this attestation service, basically. Okay. And then to go back to how you were talking about how the merchants make money from this,

since obviously your company, as you said, you're the Coca-Cola selling the syrup. So how does DLCBTC make money? Yeah. So we make mint and burn fees, just like WBTC. our fees are about 25% cheaper and that's because our cost model is cheaper. You know, Bitco has to maintain the vaults. They have vault fees.

They have deposit insurance. There's all sorts of things. They have to pay overhead. We don't have that overhead because we're not a custodian. So we try to pass on the savings to our customers. And it was funny, like talking to the insurers or like, well, is there any insurance you can get on this? And they're like, yeah, but you don't have any deposits. There's nothing there to insure, which is, which is great.

great. That's what I want to hear, you know, in the Bitcoin, building on Bitcoin world. So, so yeah, that's basically, we bake that in. And then, so whenever there's a mint and burn action, we get paid. And then when the distributors resell it, they get paid on that. So they bake our fees into their fees, basically. All right. And so I'm sure you're aware that now, you know, there's, I mean, there's so many different kinds of things happening in the world of defy on Ethereum. There's staking, there's restaking. And yet at the same time, we have this new trend also of Bitcoin Layer 2s. So I was wondering, like, are all these things that we're talking about sort of on this Ethereum side, will they also be available with the introduction of Bitcoin

layer 2s? Or how does the system work with that? Yeah. Yeah, they can be. We can use DLCBTC to, self-wrap Bitcoin to any chain, including Bitcoin Layer 2s. It's, So I'll put it this way. Maybe before I get into the LER II side, our approach has been to use to maximally utilize Defi Legos. I think composability is the best thing about defy. I think the fact that in traditional finance, each bank has to kind of build their systems and maintain their systems in-house and they're all kind of clunky.

I don't think that's great from just an engineering standpoint. I don't think that's great. I think the strength of defy is, you know, we can build this component that gets the Bitcoin over to ETH. And then, you know, people can build vaults and oracles and, you know, restaking platforms and who knows what. And then they all kind of connects. And so our approach has been, let's make the Bitcoin composable through this method and go from there. And so most of our focus has, I guess I would even say our focus is on making. a great experience, especially for traders.

Like, really the super users of Rap Bitcoin are the traders who are, you know, looking to trade it and orbit and all that stuff. And they want something that's cheap, fast, reliable, safe, you know, et cetera, easy to implement. We had no regulatory because we're not a regulated entity. We're not, we're just a software company. So that makes it easy for us to implement in new chains and new systems. But, you know, traders just really, really want that. Now, on the building on Bitcoin side, technically we are building on Bitcoin.

We are implementing this DLC invention. This is a Bitcoin invention. There's a lot of things that could also be done. There are other DLC teams like atomic finance, shell finance, lava, 10101 wallet. So there are other people building other experiences with DLCs. In our case, our actual exposure to building on Bitcoin is quite limited because all we do is lock it. We do one thing, we just lock it and use it on other chains. But, you know, we are talking to Bitcoin L2s because let's say a Bitcoin L2 is talking to a

whale or a large institution, hey, you've got some great, you know, yield opportunities on bit layer or B squared or whatever, you know, and take advantage of that. But let's say the whale or institution does not want to bridge it. They don't want to send their Bitcoin to, you know, the set of nodes on BitLayer. they could actually just self-wrap it and go in via DLCBTC on BitLayer. So we do intend to launch DLCBTC on any chain that supports DFI. We're just kind of going in order of the biggest ones first because there's a lot of our customers or traders are demanding ETHR base, you know, OPE, etc. So we're going there first.

But then as we expand to many chains, absolutely, we will also be live. on many of the Bitcoin L2s. Okay, yeah, I mean, I can see just from your blogs that you're creating a lot of new partnerships with different protocols. Are there any that you want to highlight and also at the same time call out any kind of upcoming developments for DLCBT? Yeah, yeah. You know, it's been really exciting over here because we launched an arbitram about a month ago.

I think we haven't even published a press release around that. but we're kind of catching up on a lot of marketing. For example, we have a partner, Jasper Vault, that already uses DLCBTC to do something called zero-day options. So retail can speculate on whether DLCBTC will go up or down with great amounts of leverage and they have some cool ideas around this. So anyway, you can already use it there. We're in a process to list it as collateral in AVE.

We have a strong partnership with Curve. We're partnering with symbiotic, Karak, and some of the, you know, eventually eigenlayer, some of the just kind of restaking platforms that can take, because it's sort of two ways to do restaking with this or staking. One is to take an eth loan against the LCBTC and stake that. And the other is now these new systems, these platforms I just mentioned,

are able to take the DLCBTC directly. and just use the ERC20 to secure proof of stake chains on EVM or wherever. So we're partnering with those. We're talking to Eclipse, Solana, you know, Tron, Filecoin, you name it. You know, we're just, there's a really big, I think we're tracking 47 chains right now that have asked us to launch the LCBTC there. We're just trying to go through and build out each ecosystem, you know, one at a time. And we're still a small team.

We're 12 people. So there's kind of a lot. And then, of course, bringing on the liquidity providers, you know, the process to qualify to have, you know, IMC and Galaxy and so on, be merchants. That also takes a while. So there's still, I would say we're still kind of in the setup phase. But one thing I can announce, or that is also documented on our blog, is our close partnership with ChainLink. So we, ChainLink has, so we use ChainLink CCIP Bridge.

and then we also use chaining proof of reserve. And because of the way that CCIP and POR talk to each other, when we bridge to a new chain, we just have one canonical token. So there's just one DLCBT token on each chain versus like sometimes you see like, you would see like DLCBTC.E or something if we're like bringing over. So they make that simple.

They also are building, chain links also building a price feed Oracle, which is great because most of the DFI protocol, calls want the chain link is the predominant kind of price feed oracle provider for the a obvious of the world so they're able to build a price feed where they take the bTC usd chain link price feed and they do a call to the proof of reserve feed and so like there's like some really cool defy lego stuff that we're able to do but we're basically like connecting the blue chips to the other blue chips for for starters and then building out from there so yeah and and and you know it's it's funny i

I appreciate this opportunity because half of my job is just telling people what DLCs are. You know, that's like, people are like, usually the responses are some, you know, mixture of shock and awe. They're like, wait, what? And it's been in there the whole time. How come no one's like done this before? And it's just a really simple case, I think, of Bitcoin core developers have been talking about DLCs for years. There was a lot of excitement about it. And then, you know, when it became possible with Taproot, it was amazing.

and then it just takes a few years for that to kind of diffuse out to the world. And so we're kind of in the middle of that. So half of my job is just telling people about DLCs and then they can do the research themselves. All right, Aki. Well, this has been super fascinating. Thank you so much for coming on Unchained. Hey, thanks for doing this. Appreciate it.

Don't forget. Next step is the weekly news recap. Today, presented by Wondercraft AI. Stick around for this week in crypto after this short break. Pocod is the original and largest. layer zero blockchain with over 2000 plus developers. The anticipated Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. Upgrading the infrastructure with eight times higher transaction throughput and twice as fast block times, tailored core time for the needs of every protocol,

trustless bridges to multiple chains, and revise tokenomics with a token burn to reduce inflation. Perfect for GameFi and Defi to build, grow, and scale. Get your Web3 ideas to market fast. Think big, build bigger with Pocodot. Join the community at Pocodot.network slash ecosystem slash community. Welcome to this week's crypto roundup. In today's recap, we dive into Kamala Harris's controversial economic advisors sparking crypto industry backlash, Egan Labs' air drop practices raising ethical concerns, and Goldman Sachs revealing significant Bitcoin ETF holdings. We also cover Bitcoin's record high hash rate, Celsius suing tether for two $3.4 billion, and Three Arrow's Capital's liquidators pursuing Terraform labs over the Luna crash.

Additionally, we highlight Grayscale's new crypto fund for MakerDAO's MKR and Pump. Fund's revenue surge, despite user frustration. Thanks for tuning into the weekly news recap. Let's begin. Kamala Harris, Economic Advisors, stir crypto industry backlash. The crypto community is reacting strongly to reports that Democratic presidential candidate Kamala Harris has enlisted two advisors with a history of anti-crypto views. According to Bloomberg, Harris has tapped Brian Dees and Barrett Ramamorti, both former aides to President Biden, to shape her economic policy. Dece, who previously led the National Economic Council, co-authored a White House blog advocating for stricter regulation

of cryptocurrencies. Ramamorti, who served as the National Economic Council Deputy Director under Dease, has ties to Senator Elizabeth Warren, a vocal critic of the crypto industry. The news has sparked criticism from crypto advocates who fear Harris's campaign will continue the Biden administration's tough stance on digital assets. In this week's episode of Bits and Bips, asymmetric founder Joe McCann said he doesn't see a crypto reset happening under Harris, observing that if they were going to reset, wouldn't they have pumped the brakes by now? Controversy over Eigenlabs' airdrop practices. Coin Desk reported on Thursday that eigenlabs, the company behind the Ethereum restaking platform EigenLayer, circulated a list of employee wallet addresses to various ecosystem projects preparing to

launch tokens. While some teams requested the list in order to thank Egin Labs employees, at least one project said Egan Labs sent the list without them asking for it, and that they felt pressure to send tokens to Eigen's employees. Eigen Labs employees reportedly received nearly $5 million in tokens at peak prices, sparking criticism over potential ethical lapses. In response, Eigen Labs and its associated Eigen Foundation have since banned such payouts to employees to avoid any appearance of bias. The company stated that the restrictions were implemented to maintain trust and transparency within the ecosystem, and emphasized that the payouts were initially meant to foster collaboration among projects. Goldman Sachs reveals $418 million in Bitcoin ETF holdings.

Goldman Sachs has disclosed significant investments in Bitcoin. related exchange-traded funds for the first time. According to the bank's latest quarterly 13F filing, Goldman holds $238.6 million in Black Rock's I-Shares Bitcoin Trust, comprising almost 7 million shares. Additional holdings include $79 million in Fidelity's Bitcoin ETF and $35 million in the gray-scale Bitcoin Trust. Goldman's Bitcoin positions reflect a growing trend of institutional adoption in the crypto space. Other banking giants also disclose their crypto positions. According to its latest 13F filing, Morgan Stanley had a $187 million stake in Black Rock's spot Bitcoin ETF as of the end of Q2, while nearly selling off its position in Grayscale's GBTC. Also this week, the State of Wisconsin Investment Board said it had increased its holdings in Black Rock's spot Bitcoin ETF to nearly 2.9 million shares, worth $98 million, while selling off its entire position in the Grayscale Bitcoin Trust.

Moreover, DRW Venture Capital disclosed holdings of nearly $200 million in crypto ETFs, with a sizable $150 million of that invested in the grayscale Ethereum Trust. Bitcoin hash rate reaches record high. On Monday, Bitcoin's hashradi surged to an all-time high of 627 XA-hashes per second, reflecting increased competition among miners. Meanwhile, on-chain data from CryptoQuant revealed that minor reserves have dropped to 1.8 million BTC, the lowest level since January 2021. The decline comes as miners, who typically sell their holdings during price surges, face a volatile

market. The price of Bitcoin reached a record high of $73,750 on March 14, 2024, but it has since dropped roughly 19%. The increased hash rate has also contributed to a six-month low in minor profitability, according to industry reports. Celsius sues Tether for $2.4 billion. Bankrupt crypto lender, Celsius, has filed a lawsuit against Tether, seeking to reclaim 39,542 Bitcoin valued at approximately $2.4 billion. Celsius alleges that Tether improperly liquidated the collateral during Celsius's financial turmoil in June 2022.

The lender argues that Tether's actions violated their agreement and, exacerbated its financial collapse by selling the Bitcoin at below market prices. The lawsuit is part of a broader legal strategy by Celsius to recover funds for its creditors. The company has also targeted Badger Dow, Compound Labs, and Bankor Dow in separate lawsuits. The suit against Badger Dow stems from a 2021 hack that led to substantial losses for Celsius, while Compound Labs is being sued for an Oracle-related incident that triggered mass liquidations in 2020. Bankor Dow, which is partially owned by Israeli Prime Minister Benjamin Netanyahu's relatives, is accused of mismanaging its impermanent loss protection mechanism, causing significant financial damage to Celsius.

Tether has dismissed the allegations calling the lawsuit a baseless shakedown and asserting that it acted within the contract's terms by liquidating Celsius's collateral. Tether also reassured its stakeholders that its $12 billion in equity ensures no impact on token holders, regardless of the lawsuit's outcome. Three Arrows liquidators sue Terraform Labs for $1.3 billion over Luna crash. Liquidators of the defunct cryptocurrency hedge fund Three Arrows Capital are seeking to recover $1.3 billion from Terraform Labs, the company behind the collapsed TerraUSD and Luna tokens. The lawsuit claims TerraForm induced 3 AC to invest heavily in Luna and TerraUSD by manipulating the market and inflating their prices before they plummeted in May 20,

2022, causing massive losses. The crash led to three ACs bankruptcy, with the value of its Luna holdings dropping from $462 million in April 2022 to just $2,700 by mid-May. Terraform Labs, which filed for bankruptcy earlier this year, and its co-founder Doe Kwan, who faces fraud charges, are central to the ongoing legal battle. Recovery prospects from Terraform remain uncertain. Grayscale launches crypto fund for MakerDAO's MKR. Grayscale has introduced a new single asset fund dedicated to MakerDAO's governance token, MKR. The fund, which is accessible to accredited investors, marks Grayscale's latest move to expand its product lineup. The launch follows the recent introduction of similar funds for

BittenSour's Tao and sui tokens, as well as a decentralized AI-focused fund. MKR surged by over 7% following the announcement. Grayscale has been on a role, launching five different single token trusts in the past three months. Pump. Dot Fund's fee removal boosts revenue but draws ire of users. Pump. Dot fund, a Solana-based token generator, has hit a new milestone by raking in $5.3 million in daily fees, surpassing many other platforms, including major blockchain such as Ethereum, Tron, and Solana itself. The surge in fees follows Pump. Dot Fund's recent decision to eliminate its $2 token creation fee, shifting the cost to the first buyer of each token. This change led to an explosion in token creation,

with over 10,000 tokens minted in just three hours. While the platform's revenue soared, user satisfaction plummeted. Many expressed frustration on social media, criticizing the rapid creation of tokens that often lose value almost immediately. One user commented, Nobody is entertained but your team and your pockets, highlighting the growing discontent among the platform's user base. Despite its financial success, Pump.com fund faces increasing criticism for prioritizing profits over user experience. Time for fun bits. Oops, Ethereum user pays $88,000 for a simple transaction. In a jaw-dropping blunder, an Ethereum user paid $88,000 in gas fees to send a mere $2,000,000, $200 worth of ETH. This apparent fat finger mistake has left the crypto community both laughing and

cringing. Blockchain security firm Peck Shield caught the slip up, proving that even in the world of high-tech finance, a simple keyboard slip can cost you more than just your pride, like say 40 times more. Moral of the story, always triple check before you hit send. And that's all. Thanks so much for joining us today. If you enjoyed this recap, go to UnchainedCripto.substack.com, that is Unchained Crypto.com, and sign up for our free newsletter so that you can stay up to date with the latest in crypto. Unchained is produced by Laura Shin, with help from Matt Pilchard, Juan Aronovich, Megan Gavis, Pam Majumdar, and Margaret Korea. The weekly recap was written by Juan Aronovich and edited by Nelson Wang. Thanks for listening.

Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily, five days a week, with host Noel Atchison. Follow the Coin Desk Podcast Network for some of the best shows in crypto.