March 22, 2023
Securing Bitcoin Loans on DLCs with sBTC Liquidation
DLC.Link is building infrastructure that offers a secure and decentralized way for smart contracts to interact with the Bitcoin blockchain
Stacks, sometimes referred to as a "Layer 1.5", is a Bitcoin-friendly blockchain featuring expressive smart contracts. In December 2022, the Stacks team published the sBTC whitepaper describing it as a decentralized two-way peg to use BTC in Stacks contracts. The Stacks team believes that sBTC will make Bitcoin more powerful by allowing developers to build decentralized finance applications and other experiences that take advantage of the security of the Bitcoin blockchain.
Although an impressive technology in its own right, sBTC does raise concerns from Bitcoiners who would want to avoid pegging their BTC to secondary Bitcoin layers. This article digs deep into those concerns and how Discreet Log Contracts (DLCs) provide a potential solution that strengthens both the utility of Bitcoin and the core value proposition of sBTC.
Advantages of sBTC in Short Transactions
sBTC allows Bitcoin holders to interact with decentralized applications (dApps) in more expressive ways. For instance, assuming two BTC holders want to trade a non-fungible token (NFT), the flow might be as follows:
- One party initiates a BTC transaction to purchase the NFT
- The payment gets pegged into sBTC anonymously and held in a smart contract by the NFT marketplace on Stacks
- The smart contract pegs out the sBTC via a wrapped contract that points the pegged-out BTC directly at the Bitcoin wallet of the NFT seller
In this example, sBTC enables composability and is highly useful as it provides instant finality.
How DLCs Empower Long-Running Loans on Bitcoin
One of the main applications of BTC involves posting it as loan collateral. Web3 has a long history of custodian and bridge failures, so conservative Bitcoiners are generally skeptical of placing BTC collateral into loans on other chains. Since sBTC is secured by the Stacks network, this dependency is expected to be an issue hindering the adoption of sBTC in lending.
DLCs can help. Simply put, a DLC is a simple smart contract on Bitcoin that enables trust-minimal transactions between two parties. Users can place BTC collateral in a DLC, where it is locked on-chain in a multi-sig.
For Stacks, the DLC can be configured so that it liquidates directly to the sBTC peg address for liquidation. Stacks smart contracts signal the DLC attestation layer to liquidate BTC to the sBTC peg address.Then, the sBTC can automatically flow to a liquidation contract on Stacks for auction, and sale proceeds can be channeled to repay the lending protocol.
Using DLCs alongside sBTC enables conservative Bitcoiners to overcome the fear of holding their BTC on any other layer besides Bitcoin mainchain.
Benefits of Locking Bitcoin into a DLC and Using sBTC for Liquidation
Using DLCs to lock BTC lets users maintain custody of their coins while still participating in DeFi. Locking BTC into a DLC can enable it for lending and trading within the Stacks ecosystem while still keeping the Bitcoin on mainchain.
For Stacks applications, there are several benefits of using sBTC for liquidation. For one, it allows for easier access to liquidity, as sBTC can be traded on multiple DeFi platforms within Stacks. Importantly, sBTC acts as an excellent alternative to centralized wrapping methods.
Another benefit of using DLCs for locking BTC is that they allow for more privacy and security when conducting transactions. By using a DLC, parties can agree on the terms of a contract without disclosing any sensitive information to the blockchain.
Furthermore, using DLCs for locking BTC can help reduce the risk of hacks and other security breaches common in cryptocurrency. DLCs ensure that users' holdings are secure and protected from external threats.
By providing a secure and trustless way for Bitcoiners to participate in DeFi, DLCs can increase liquidity and provide a more secure and private way of conducting transactions. Additionally, by reducing the risk of hacks and security breaches, DLCs can help to build trust in the overall cryptocurrency ecosystem.
Building a Secure and Decentralized Infrastructure for Bitcoin Smart DeFi
DLC.Link implements DLC technology to unlock Bitcoin liquidity without the involvement of an intermediary. Our infrastructure serves developers building applications that use native BTC in a manner conforming with the Bitcoin principle of a trust-minimal monetary system.
