Analysis of DLC Principles and Optimization Solutions

1. Introduction

The Discrete Log Contract ( DLC ) is a contract execution scheme based on oracles proposed by Tadge Dryja from MIT in 2018. DLC allows both parties to make conditional payments based on predetermined conditions, executing payments through pre-signed agreements and oracle-signed results. Compared to the Lightning Network, DLC has advantages in privacy, support for complex contracts, and counterparty risk control.

However, there are still some risks and issues with DLC:

• Risk of oracle key leakage or loss
• Centralization issue of Oracles
• Decentralized oracles cannot directly perform key derivation
• Oracle node collusion risk
• Fixed denomination change problem

This article will explore some optimization solutions to address the aforementioned issues and enhance the security of the Bitcoin ecosystem.

2. DLC Principle

Taking Alice and Bob betting on the parity of the hash value of the n+k-th block as an example:

1. Initialization: Generate generator G, order q
2. Each party generates a key pair
3. Create Capital Injection Transaction
4. Create Contract Execution Transaction
5. The oracle calculates and broadcasts the commitment
6. Alice and Bob calculate the new public key
7. The oracle broadcasts the signature based on the result.
8. The winning party uses the new private key to withdraw assets.

3. DLC Optimization Plan

3.1 Key Management

Oracles should use BIP32 to derive child keys, and use the private key and counter hash as a random number to prevent duplication or loss.

3.2 Decentralized Oracle

Using Schnorr threshold signatures to implement decentralized oracles, enhancing security, reliability, and accountability.

3.3 Decentralization and Key Management Coupling

Using a distributed key derivation method, it allows oracle nodes to perform key derivation while only holding private key shares.

3.4 OP-DLC: Oracle Trust Minimization

Introduce an optimistic challenge mechanism, where oracles must stake in advance. Any honest participant can challenge and punish malicious oracles.

3.5 OP-DLC + BitVM bridge

Combine OP-DLC and BitVM to solve the funding change issue, provide multiple deposit and withdrawal channels, and achieve minimal trust in oracles.

4. Conclusion

DLC combined with technologies such as Taproot and BitVM can achieve more complex off-chain contract verification and settlement. Coupled with the OP challenge mechanism, it can realize oracle trust minimization, bringing more possibilities to the Bitcoin ecosystem.