Discreet Log Contract (DLC) | Bitcoin Glossary | Mapping Bitcoin

Overview

Discreet Log Contracts (DLCs) are a protocol for creating conditional payments on Bitcoin that depend on real-world events. Proposed by Tadge Dryja in 2018, DLCs use a clever combination of adaptor signatures and oracle attestations to enable financial contracts like bets, insurance, and derivatives -- all while keeping the contract terms private and the on-chain footprint minimal.

How It Works

A DLC involves three participants: two contracting parties (Alice and Bob) and an oracle that attests to real-world outcomes.

┌─────────┐                              ┌─────────┐
│  Alice   │◄──── Funding Transaction ───►│   Bob   │
└────┬─────┘     (2-of-2 multisig)       └────┬────┘
     │                                        │
     │   Pre-sign Contract Execution Txs      │
     │   for all possible outcomes             │
     │◄──────────────────────────────────────►│
     │                                        │
     │         ┌──────────┐                   │
     │         │  Oracle  │                   │
     │         │ attests  │                   │
     │         │ outcome  │                   │
     │         └────┬─────┘                   │
     │              │                         │
     │    Oracle signature enables            │
     │    the correct CET to be broadcast     │
     └────────────────────────────────────────┘

1. Setup: Alice and Bob agree on the contract terms and an oracle to use
2. Funding: They create a 2-of-2 multisig funding transaction
3. CETs: They pre-sign Contract Execution Transactions (CETs) for every possible outcome, using adaptor signatures locked to the oracle's anticipated attestation points
4. Settlement: When the oracle publishes its attestation, the appropriate CET becomes spendable, and the winner can claim the funds

Privacy Properties

DLCs are remarkably private:

• The oracle does not know that a contract depends on its attestation
• On-chain, a DLC looks like an ordinary multisig transaction (especially with Taproot)
• Third parties cannot determine the contract terms from the blockchain
• The oracle never learns who is using its data or for what purpose

Use Cases

• Price bets: Wagering on the future price of bitcoin or other assets
• Insurance: Parametric insurance contracts that pay out based on verifiable events (weather, earthquakes)
• Futures and options: Synthetic financial derivatives settled in bitcoin
• Sports betting: Decentralized prediction markets

Limitations

• The number of possible outcomes must be enumerated upfront, which can be impractical for contracts with many possible values (though numeric decomposition techniques help)
• Oracle trust is still required for honest attestation, though the oracle cannot steal funds
• Interoperability between DLC implementations is still maturing