Discover how dlcBTC offers a transparent and secure path to using Bitcoin in DeFi, with every step fully visible on the blockchain.
dlcBTC is a safer wrapped Bitcoin offering a theft-proof bridge to DeFi, enabling users to engage in yield-generation activities such as staking, lending, and trading.
Unlike traditional custodial services, dlcBTC leverages Discreet Log Contracts (DLCs), allowing merchants (institutions with 10+ Bitcoins) to lock their holdings in a unique multi-sig, ensuring they maintain control throughout the process.
This institutional-friendly approach reduces the risks associated with centralized custodians, such as fraud and government seizure.
This article aims to detail the transparent, auditable process of minting dlcBTC, from locking Bitcoin into a multi-sig DLC to its eventual minting on blockchain networks such as Ethereum and Arbitrum.
We will break down each step, highlight key players like the DLC Attestors, and showcase the security and transparency of the entire process.
Anatomy of a dlcBTC Transaction
The minting process of dlcBTC involves some key steps, each designed to maintain transparency, security, and full auditability on-chain.
Minting Flow
Step 1
A merchant first creates a vault object on the destination chain where they want the dlcBTC-wrapped bitcoin token to be minted.
This could be Ethereum, Arbitrum, Base, or other supported networks. They are assigned a unique ID for this vault (a UUID).
Step 2
A Bitcoin PSBT (partially signed Bitcoin transaction) is then generated and used to deposit into the self-custodial dlcBTC network.
The Bitcoin will be locked into a 2-of-2 multisig between the merchant and the dlcBTC decentralized Attestor network, committing to the UUID from step 1.
This pre-signature mechanism ensures that the locked BTC will always be returned to the original depositor - even in a system – making dlcBTC theft-proof.
Once the user signs this with their wallet, they send it to the Attestor network.
Step 3
The Attestors independently verify the transaction, ensuring everything is correct and verifying the amount.
If everything looks good, and this vault is brand new or is currently empty (not holding any BTC collateral), the attestors will broadcast the transaction.
Suppose there is already some Bitcoin collateral in this vault. In that case, the attestors will do a threshold signature flow using the FROST system to sign their side of the multisig, spending out from the old DLC transaction and into a new one, combining the old value and the new deposit from the user.
Then, this new transaction will be broadcast. In this way, every vault is represented by one Bitcoin transaction at any time.
Step 4
Once the Attestor network has confirmed enough Bitcoin confirmations on the transaction, they again perform a threshold signing flow, this time for the destination chain.
Redemption Flow
Step 1
When the time comes for the merchant to redeem their bitcoin from their dlcBTC token, the process is similar.
The merchant first interacts with the destination chain, burning the amount of dlcBTC tokens they want to redeem in Bitcoin.
Step 2
Then, the Merchant signs another PSBT, which will send some or all of the Bitcoin from the Vault transaction back to their wallet, and any remaining will be sent back into a new transaction for the Vault. This PSBT is sent to the Attestors.
Step 3
The attestors independently verify the transaction, and if everything looks correct, they use FROST threshold signing to sign their side of the 2-of-2 transaction and then broadcast the transaction.
Shortly thereafter, the bitcoin will appear back in the Merchant’s wallet.
Real-World Examples
- The Bitcoin funding transaction, showing the Bitcoin locked into the multi-sig DLC: View Transaction
- The multi-sig DLC address itself: View Multi-sig Address
Example of a Partially Signed Transaction (PSBT)
A PSBT is a key element of this process, offering clarity on each step involved in the transaction.
For example, when merchants initiate the Bitcoin locking process, they generate a PSBT that records the conditions under which the Bitcoin will be released.
This transparency makes it easy to verify the conditions of the transaction.
Fee Structure
- Minting dlcBTC incurs a fee of 12 basis points (0.12%).
- Burning dlcBTC to redeem Bitcoin incurs a fee of 15 basis points (0.15%).
These fees are also visible on-chain, providing full transparency on costs associated with using the service.
Transparency in Action
One of the key value propositions of dlcBTC is that every step of the minting process is visible and auditable on-chain. This ensures complete transparency—no hidden processes or "magic" behind the scenes.
Bitcoin holders can trace their assets from the moment they lock them into the multi-sig DLC to the point where they receive dlcBTC tokens on another blockchain.
The process of locking Bitcoin into the DLC is verifiable via the Bitcoin blockchain, allowing anyone to track the funds.
The integration of Chainlink’s Proof-of-Reserve (PoR) further enhances the transparency and auditability of dlcBTC by providing real-time verification of Bitcoin reserves.
Chainlink’s decentralized oracle network continuously monitors and reports the status of the Bitcoin locked in the DLC, ensuring that the amount of Bitcoin backing dlcBTC is always verifiable and accurate.
This additional layer of security means that users can confidently trust that their dlcBTC is fully collateralized, with all reserve data independently validated and visible on-chain, reinforcing dlcBTC’s commitment to full transparency and eliminating risks of under-collateralization.
Conclusion
In summary, dlcBTC offers a safe, transparent, and fully auditable way for institutions and merchants to mint wrapped Bitcoin without the risks associated with custodial services.
Using multisig DLCs ensures merchants retain control over their Bitcoin while participating in DeFi.
With the entire process visible on-chain and validated by decentralized DLC Attestors, dlcBTC stands out as a secure and efficient alternative to traditional wrapped Bitcoin services.
