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Bitcoin is a fixed currency.
Thanks to Bitcoin, anyone in the world can freely transfer funds through a peer-to-peer network without the need for financial institutions. Funds that cannot be scrutinized by authorities, devalued by governments, monopolized by corporations, or stopped by borders.
However, when it comes to transactions, reliance on trusted third parties is still necessary. Why is this a problem? Because trusted third parties have always been and will continue to be security vulnerabilities.
Bitcoin Transaction Disruptions
Both individuals and financial institutions rely on trusted third parties such as clearinghouses and exchanges to settle Bitcoin spot and derivative transactions.
Sound familiar? Yes, this is exactly what happened during the contagion event in 2022, with companies like Celsius, Terra, Three Arrows Capital, BlockFi, Voyager, FTX, and others collapsing. Most of the time, end-users trusting these third parties lost everything.
Centralized exchanges are inherently insecure because funds can accumulate without any supervision. Trading and custody should never be mixed.
Seeing the bankruptcy list above, people might feel helpless and declare that Bitcoin transactions are impossible. On the contrary, we took another look and wondered: Does Bitcoin trading really need to occur on the ledger of a trusted third party? Certainly not. Bitcoin itself provides a solution!
Bitcoin is a complex and dynamic system, yet to find a balance point, and no one can predict its ultimate role. Defining Bitcoin is challenging because it involves multiple domains. Some see it as a financial asset, while others view it as a currency, a network, or even an ideological manifesto.
As developers of innovative trading solutions, we are particularly interested in one dimension: Bitcoin as a technological infrastructure. This technological aspect is the least obvious, perhaps due to its complexity, but we find it one of the most fascinating aspects of the unknown.
We believe that the Bitcoin protocol provides an ideal cornerstone for developing robust financial services.
Building the Future of Bitcoin Trading
Bitcoin's code consists of operations that, when assembled, form scripts. This available list of basic operations evolves over time, adding new operations to enable more complex scripts. This evolution is typically slow, but this gradual pace helps maintain the stability and security of the protocol.
Of course, the simplest script is the peer-to-peer transfer of value units. The first trading platforms were built by integrating this functionality: funds could be directly transferred from wallets to platforms for processing.
The Lightning Network is an application built with more complex scripts. It allows for risk-free instant transfers of BTC. LN Markets is the first trading platform to integrate this new protocol into its core development.
Targeting the retail market, its value proposition lies in the extreme simplification of the trading experience: users can handle all transactions from creating an account to transferring collateral in just a few seconds, all done instantly from the Lightning wallet. The value proposition of instant transactions has resulted in a cumulative trading volume of over $2 billion.
Building on this success, we naturally turned our attention to discreet log contracts (DLC). DLC is a local "smart contract" built on Bitcoin, relying only on the prices published by oracles to achieve returns.
Today, we believe it's time to further advance on the basis of the DLC protocol, achieving fully trustless transactions and putting an end to the fund aggregation by trusted third parties.
Trust-minimized transactions on Bitcoin are now a reality
Over the past few months, we have been secretly building an untrusted over-the-counter derivatives trading platform designed to meet the needs of crypto financial institutions: DLC Markets.
Any type of financial instrument can be traded on the DLC market, with almost no counterparty risk: Bitcoin futures and options, products based on hash rate and block space, and potentially any asset in the world.
Traditionally, institutional trading has been centralized and standardized. To some extent, clearinghouses (CCP) control funds and manage settlements. Paradoxically, despite technological advances, the risks of Bitcoin trading are much higher than traditional trading: no regulation, trading and custody in the same place, conflicts of interest, numerous risks, and frequent bankruptcies.
DLC Markets aims to address these issues. Drawing inspiration from traditional over-the-counter trading, we are developing a market where participants can meet and trade. Similar to ISDA/CSA agreements, collateral is exchanged directly among peers.
To manage settlements, smart contracts (DLC) act as CCP. These smart contracts are unique for each transaction, ensuring the independence of fund management, complete transparency for trading participants, and confidentiality for external participants.
Market participants can chat with each other and submit requests for quote (RFQ). After reaching a trade agreement, they confirm the transaction parameters and submit the initial margin to the smart contract on the Bitcoin blockchain. Throughout the transaction process, additional margin, clearing, and settlement may occur, unlocking the corresponding results in the smart contract. Any dispute resolution is entirely dependent on the publication of independent oracles.
Oracles are reliable third parties that can accurately verify certain events. Unlike custodians, oracles are not responsible for interpreting or executing contracts. Establishing or unilaterally resolving contracts does not require explicit approval from oracles. The only requirement is to use data regularly published by the oracle, which is freely provided and shared.
While traditional DLCs may be challenging to implement, we have introduced a new approach, using a coordinator to address the free-choice dilemma at the start of DLC. This approach can also incorporate additional margin, clearing, and net settlement into the DLC process.
For a technical deep dive into our solution, please refer to our whitepaper.
The Future is Now
DLC Markets represents a paradigm shift, providing a trustless and secure alternative to centralized exchanges that have long dominated the financial sector. You can already sign up for our beta version!
To accelerate the development of Bitcoin as infrastructure, we have completed a $3 million seed round led by Self-Destruction Capital, Lemniscap, and Timechain, joining our current investors Arcario, Bitfinex, and Fulgur Ventures. We are excited to collaborate with investors who, like us, believe that Bitcoin-native companies will change the world.
Welcome to a new era of transparency, efficiency, and resilience in derivatives trading.
This is a guest post by LN Markets. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine. |
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Post time 17-2-2024 21:42:37