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Discreet Log Contracts: Scalable Smart Contracts for Bitcoin

The main innovation behind DLCs is that smart contract are made scalable and private, while also allowing the parties to determine the outcome of a contract without involving the oracle, trusting a third-party or each other.

Most smart contracts that exist on blockchain networks today require on-chain interactions. Whenever the demand for block space is high, interacting with these smart contracts means high fees and/or long waiting times are involved. DLCs use a technique similar to the Lightning Network so that the contract and most of the activity is not published on the blockchain.

On-chain contracts bloat the size of the blockchain which also increases the requirements for running a node on top of higher fees or longer wait times. They are also public with any observer able to see all the interactions.

With DLCs, neither blockchain observers nor Oracles will not know the contract terms and the oracle will never know the transaction amounts. Only two transactions are published on chain in the cooperative case, where DLCs look like a normal multi-signature spend, such that no external observer can learn of the contract’s existence or details from the public ledger. Hence, why they are called Discreet Log Contracts.

In this article, we’ll provide an overview of Discreet Log Contracts, look at the game theoretics involved, and the potential applications.

Introducing Discreet Log Contracts

A Discreet Log Contract (DLC) is a simple oracle contract scheme proposed by Tadge Dryja of MIT in 2018. DLCs can be executed using almost any blockchain, including Bitcoin, opening up use cases such as peer-to-peer derivatives, prediction markets and sports betting.

More recently, DLCs have been redesigned to make them more scalable and private by using adaptor signatures, a special use case of Schnorr signatures. While Schnorr signatures not yet implemented in Bitcoin, the signatures happen off-chain which enables DLCs to be possib...

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