Secure and auditable dlcBTC minting process

Learn how dlcBTC transparently and securely enables BTC to be used in Decentralized Finance, with every step fully visible on the blockchain.

dlcBTC is a more secure wrapped BTC that provides a theft-proof bridge for Decentralized Finance, enabling users to participate in yield activities such as staking, borrowing, and trading.

Unlike traditional custody services, dlcBTC uses discreet log contracts (DLCs) to enable counterparties (institutions holding 15 BTC or more) to uniquely multi-signature lock their assets, ensuring they maintain control throughout the process.

This institution-friendly approach reduces the risks associated with centralized custody, such as fraud and government seizure.

This article aims to provide a detailed introduction to the transparent and auditable process of minting dlcBTC, from locking BTC in a multi-signature DLC to ultimately minting it on blockchain networks such as Ethereum and Arbitrum.

We will break down each step, focusing on key participants such as DLC verifiers, and demonstrate the security and transparency of the entire process.

Analysis of dlcBTC trading

The minting process of dlcBTC involves some key steps, each aimed at maintaining on-chain transparency, security, and full auditability.

Casting process

Step 1

The acceptor first creates a vault object on the target chain and mints wrapped BTC dlcBTC in the vault.

Minting can be done on Ethereum, Arbitrum, Base, OP, or other supported chains. They are assigned a unique ID (UUID) for this Vault.

Step 2

Generate a BTC PSBT (partially signed Bitcoin transaction) and use it to deposit funds into the self-custodied dlcBTC network.

BTC will be locked in a 2-of-2 multi-signature in Counterparty and dlcBTC's decentralized Attestor network, and submitted to the UUID in step 1.

This pre-signing mechanism ensures that the locked BTC will always be returned to the original depositor (even in the system), making dlcBTC theft-proof.

Once users sign the agreement, they will send it to the Attestor network.

Step 3

Validators independently verify transactions to ensure everything is correct and validate the amount.

If everything is correct, and the insurance pool is either brand new or currently empty (holding no BTC collateral), the validator will broadcast the transaction.

Assuming there are already some BTC collateral in this Vault. In this case, the prover will use the FROST system to perform a threshold signature process to sign the multi-signature from their side, spend from the old DLC transaction, and enter the new transaction, combining the old value with the new deposit from the user.

Then, this new transaction will be broadcasted. In this way, at any time, each BTC transaction represents a Vault.

Step 4

Once the Proof-of-Stake network confirms enough BTC confirmations in the transaction, they will perform the threshold signature process again for the target chain.

Redemption Process

Step 1

When the merchant needs to exchange dlcBTC for Bitcoin, the process is similar.

The merchant first interacts with the target chain and burns the amount of dlcBTC tokens they want to exchange in BTC.

Step 2

The acceptor then signs another PSBT, sending some or all of the BTC from the Vault transaction back to their wallet, and the rest of the BTC initiates a new transaction and sends it back to the Vault. This PSBT is sent to the validator.

Step 3

Validators independently verify transactions, and if everything looks correct, they will use FROST threshold signatures to sign one party of the 2-of-2 transaction, and then broadcast the transaction.

Later, BTC will reappear in the merchant's wallet.

dlcBTC Minting Example (On-chain Query)

BTC funds transaction, showing BTC locked in multi-signature DLC: View transaction

Multisig DLC address itself: View multisig address

Example of Partially Signed Bitcoin Transactions (PSBT)

PSBT is a key element of this process that can clarify each step involved in the transaction.

For example, when a merchant initiates the BTC locking process, they will generate a PSBT to record the conditions under which BTC is released.

This transparency makes it easy to verify transaction conditions.

Fee structure

Casting dlcBTC requires a fee of 12 basis points (0.12%).

To redeem BTC by destroying dlcBTC, a fee of 15 basis points (0.15%) is required.

These costs are also visible on the chain, providing full transparency of the associated costs of using the service.

Transparent Casting/Destroying

One of the key value propositions of dlcBTC is that every step of the minting/burning process is visible and auditable on the chain. This ensures complete transparency—no hidden processes or behind-the-scenes "magic".

BTC holders can track their assets from the moment they lock them up to the moment they receive the dlcBTC tokens on another blockchain.

The process of locking BTC to DLC can be verified through the BTC blockchain, allowing anyone to trace funds.

Integration of Chainlink's Proof of Reserve (PoR) further enhances the transparency and auditability of dlcBTC by providing real-time verification of BTC reserves.

The Chainlink decentralized oracle network continuously monitors and reports the status of BTC locked in DLC, ensuring that the amount of BTC supporting dlcBTC is always verifiable and accurate.

This additional security layer means that users can confidently trust that their dlcBTC is completely secure, with all reserve data independently verified and visible on the chain, strengthening dlcBTC's commitment to full transparency and eliminating the risk of under-collateralization.

Conclusion

In short, dlcBTC provides institutions and issuers with a secure, transparent, and fully auditable way to mint wrapped BTC without the risks associated with custodial services.

Using multi-signature DLCs can ensure the underwriter retains control of their BTC when participating in Decentralized Finance.

Due to the visibility of the entire process on the chain and the verification by decentralized DLC verifiers, dlcBTC becomes a secure and efficient alternative to traditional wrapped BTC services.