DLCs Are Making Smart Contracts Private on Bitcoin

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"Republican win"; "Democratic win." These are the parameters for the first smart contract escrowed bet placed on Bitcoin's mainnet.

On Sept. 8, BTCPay Server founder Nicolas Dorier and Suredbits founder Chris Stewart entered the bet on the 2020 U.S. presidential election outcome using a discrete log contract, a form of smart contract that became feasible on Bitcoin just this year, thanks to independent Bitcoin developer Lloyd Fournier's technical advancements in the realm of so-called "Scriptless-scripts" on Bitcoin's blockchain.

Described by developer Gert-Jaap Glasbergen as "Invisible smart contracts," discrete log contracts are structured to look like standard multi-signature transactions on Bitcoin's blockchain.

If someone were searching for the transaction on the ledger, they would have no way of knowing it's a smart contract or, in Dorier and Stewart's case, the details of the bet.

These smart contracts have theoretically been feasible since Bitcoin's inception, but groundbreaking work with ECDSA adapter signatures in the past year has brought them from theory to application.

The hedging use case is outlined by Glasbergen in his "Invisible smart contracts on the Bitcoin blockchain" blog post.

The "Forward contracts" would entail two parties entering a DLC, with one party agreeing to purchase a certain amount of bitcoin for an agreed-upon price, and the other party providing the liquidity for this purchase.

When the time comes for the contract to settle, the contract pays the buyer the amount of bitcoin per the price specified at the time the contract was formed, not per the current exchange rate.

In essence, these forward contracts are a way to long or short bitcoin.

These same forward contracts could be used to settle synthetic commodities in bitcoin-denominated terms, as well.