Bitcoin Dlcs

Discreet Log Contracts (DLCs)

DLCs let two parties bet on real-world outcomes (price, sports, weather) with on-chain settlement, without revealing contract terms on chain. The oracle never knows about the bet; the chain only sees a 2-of-2 multisig + a CET that looks like an ordinary cooperative spend.

Original 2017 paper: Tadge Dryja. Modern specs: DLC Specification working group (github.com/discreetlogcontracts/dlcspecs).

Core mechanism

1. Oracle setup (one-time):

   • Oracle has long-term key P_oracle.
   • For each event, oracle publishes nonce R_event = k * G in advance.
   • Oracle pledges: when event happens, publishes s_outcome such that s_outcome * G = R_event + e_outcome * P_oracle where e_outcome = H(R_event, outcome_label).

2. Funding (party setup):

   • Alice and Bob agree on contract: payout function (outcome → (a, b)).
   • They pre-sign all possible CETs as adaptor signatures over each outcome's T_outcome = R_event + e_outcome * P_oracle.
   • Together they fund a 2-of-2 multisig output (the funding tx).

3. Settlement:

   • Oracle publishes s_outcome for the actual outcome.
   • The party favored by that outcome adapts their pre-signed CET with s_outcome and broadcasts.
   • Settlement happens in a single tx, looking like a generic 2-of-2 spend on chain.

4. Refund (timeout):

   • If oracle never publishes (event canceled), parties can refund via a CSV time-locked refund tx pre-signed during funding.

Why "discreet"

• On chain, an observer sees: funding tx (2-of-2 multisig output), settlement tx (a regular spend). No contract terms, no oracle key, no payout structure.
• Oracle never learns about the contract. Oracles can serve many unrelated DLCs from one event publication.

Numerical outcomes

For continuous outcomes (e.g., BTC price ∈ [0, 100k]), oracle uses multi-nonce attestation: publishes one R_i per bit / digit of the outcome. Parties pre-sign CETs covering ranges of bit patterns.

CET count grows with precision:

• 0.1% precision over a 100k range → ~1000 CETs.
• Modern DLC libraries use CET trees + adaptor combinator tricks to compress.

DLC vs other primitives

Standardization

github.com/discreetlogcontracts/dlcspecs defines:

• Funding protocol.
• CET construction.
• Adaptor sig encoding.
• Oracle attestation format.

Wire protocol uses Lightning-style TLV messages over Tor / clearnet.

Implementations

• rust-dlc (Crypto Garage) — most complete; production-grade.
  • rust-dlc-manager orchestrates funding/CET/refund tx chain.
  • Integrates with rust-bitcoin, bdk.
• dlc-protocol (DLC.dev) — Python.
• dlc-tools — JS/TS utility libs.
• DLCKit — Bitfinex's iOS DLC client.

Use cases

• Sports betting — outcome = team A or B wins.
• Price hedging — bilateral derivatives on BTC/USD.
• Parametric insurance — payout based on weather oracle.
• Lightning Loop alternatives — DLC-based off-chain mechanisms.
• Lava / Atomic Finance — production DLC apps.

Operational considerations

• Oracle availability: parties must trust the oracle to publish the outcome. Multiple oracles → "DLC with k-of-n oracles" combines attestations.
• CET storage: pre-signed CETs (per outcome) can total megabytes of data per contract. Both parties must persist their share.
• Fee management: each pre-signed CET has a fixed fee at construction time. If mempool fee rates spike, settlement may not confirm. Mitigation: CPFP via anchor outputs, RBF if not pre-signed immutably, or fee-bump-via-replacement on a per-CET basis.

Security caveats

• Oracle compromise = funds at risk. Use multi-oracle (k-of-n) structure for high-value contracts.
• Replay across CETs — adaptor points must be unique per outcome (built-in via e_outcome derivation).
• Refund path must always exist; otherwise oracle outage = permanent fund lock.

Common pitfalls

• Underestimating CET storage requirements for fine-grained numerical contracts.
• Hard-coding fee rates instead of using anchor outputs / fee bumping.
• Trusting a single oracle for high-value contracts.
• Confusing DLC oracles (which are just signers, no chain) with chain oracles like UMA, Chainlink, etc.

See also

• adaptor-sigs/SKILL.md
• schnorr/SKILL.md
• ../../libraries/rust-dlc/SKILL.md
• ../../privacy/atomic-swaps/SKILL.md