Macauley Peterson

Institutional holders of bitcoin who want to earn a yield on their assets in commonly used DeFi protocols today can only do so in size by sending it to BitGo for wrapped bitcoin (wBTC).



Launched today, DLC.Link’s new trust-minimized way to wrap bitcoin is looking to become a viable alternative.



The “DLC” in the name stands for Discreet Log Contracts, which preconfigure the conditions under which locked bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) can be transferred, meaning the owner retains full ownership of their coins on the Bitcoin network.



A representation is then minted on a target chain as dlcBTC — an ERC20 token which debuts on <a href="https://blockworks.co/tag/arbitrum">Arbitrum</a>.



Read more: <a href="https://blockworks.co/news/sommelier-defi-strategy-vaults-now-live-on-arbitrum">Sommelier DeFi strategy vaults now live on Arbitrum</a>



According to Aki Balogh, co-founder and CEO of DLC.Link, the design ensures that the BTC can only go back to the address of the original depositor.



“It’s literally a theft proof protocol,” Balogh told Blockworks.



The process makes use of a set of “attestors” — trusted node operators that run both a Bitcoin full node and a node on the destination chain — which function like an <a href="https://blockworks.co/tag/oracles">oracle</a>, monitoring blockchain events and validating outcomes.



At launch, seven attestors will participate, each holding a private key shard. A threshold of five is required to be able to move the bitcoin on-chain, Balogh said, noting that even in the event of collusion they could not steal the depositor’s bitcoin and at worst only censor their ability to unlock it.&nbsp;



“We are starting with seven named institutions that have brands and that have something to lose from a reputation perspective if they collude,” Balogh explained.



The project’s plan is to progressively decentralize, making use of a DLC token beginning in the third quarter.



This mechanism is in contrast to other systems for bridging or staking bitcoin, like Babylon and Nomic, which rely on additional validator sets to protect deposited BTC.



In the case of DLC.Link, the user self-wraps and doesn&#8217;t send their BTC to any external address.



Nomic’s co-founder Matt Bell told Blockworks the DLC approach is “something we even want to get to eventually.”



“I think that&#8217;s a smart way to do it, but that is a fundamentally different thing than Babylon-based staking,” Bell told Blockworks.



Read more: <a href="https://blockworks.co/news/liquid-staked-bitcoin-yield-option-btc-holders">Liquid staked bitcoin provides new yield option for BTC holders</a>



The redemption process allows users to burn the dlcBTC tokens through the issuing contract. Attestors then build a consensus to release the user&#8217;s locked bitcoin, rather than relying on a single custodian like <a href="https://blockworks.co/tag/bitgo">BitGo</a> to retrieve the original BTC.



“We took it from a more maxi perspective,” Balogh said. “You can’t ever trust an intermediary and expect it to scale to trillions of dollars of value — no bridge or custodian would be secure enough to hold that much.”



The project mirrors BitGo’s merchant system, where a set of companies receive a license from the wBTC DAO. DLC is onboarding the same companies that are wBTC merchants to also become dlcBTC merchants, Balogh said.



The first merchant is <a href="https://blockworks.co/tag/amber-group">Amber Group</a>, which sought a faster and cheaper way to deploy bitcoin on Ethereum, encouraged by the Arbitrum Foundation.



DLC.Link charges a mint and burn fee, but one which compares favorably with wBTC from BitGo, Balogh said.



A BitGo spokesperson told Blockworks its fees are variable based on several factors such as speed and volume of conversions.



Although the product is competitive with BitGo, dlcBTC requires merchants to use a custodian or wallet that supports <a href="https://blockworks.co/tag/taproot">Taproot</a>, a scarce bunch which includes BitGo, Ledger Live and Cobo.



“[BitGo has] actually been surprisingly open-minded, and maybe that&#8217;s because they see that this is actually a future solution that they don&#8217;t want to miss out on,” Balogh said.



Amber Group is building Taproot support into their proprietary wallet and Balogh expressed pride at driving forward Taproot adoption.



Read more: <a href="https://blockworks.co/news/op-cat-bitcoin-taproot-wizards">Satoshi-era Bitcoin code idea gets a boost from Taproot Wizards</a>



Once on Arbitrum, dlcBTC will be deployed in <a href="https://blockworks.co/tag/curve">Curve</a> and <a href="https://blockworks.co/tag/uniswap">Uniswap</a> pools, and is expected to find its way into borrowing and lending protocols.



Secondary trading through DeFi protocols is the only way retail users can access dlcBTC since, like wBTC, it can only be minted and redeemed by merchants.



A partnership with Swiss fund STS Digital will offer covered calls on dlcBTC, Balogh said.



THORchain provides an entirely different way to earn yield on native bitcoin.



Read more: <a href="https://blockworks.co/news/native-bitcoin-in-defi-this-dex-wants-to-boost-trust">Native bitcoin in DeFi — This DEX wants to boost trust</a>



In the future, Balogh expects dlcBTC to be available on other chains as well, either natively or using a <a href="https://blockworks.co/news/chainlink-ccip-launch">cross-chain messaging protocol like CCIP</a> or <a href="https://blockworks.co/tag/wormhole">Wormhole</a>.



“We&#8217;re following customer demand on which chains and where we should go, but Arbitrum seemed a really good choice for starters,” he said.



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Building a better wrapped bitcoin for DeFi

Sam Reynolds

<div id="highlights-block_60e85c561089b" class="highlights">
 <ul>
 <li>Continued interest in DeFi means the value of ether has risen steadily even as bitcoin enters a bear market </li>
 <li>But ether, as a store of value for DeFi, might have come competition on the horizon</li>
 </ul>
 
</div>



Decentralized Finance (DeFi) is proving to be the great differentiator between bitcoin and ether, as a new report from CoinDesk Research shows that bitcoin had one of its worst quarters ever, while ether had double-digit gains.&nbsp;



In the second quarter of 2021, CoinDesk Research found that bitcoin had its third-worst quarter ever, in terms of price performance, with the CoinDesk Bitcoin Price Index (XBX) dropping 40.39%. Only the fourth quarter of 2018, where it dropped by 44%, and the first quarter of 2018, where it posted a 50% decline, were worse. In total contrast, the CoinDesk Ether Price Index (ETX) finished the quarter up 18.69%.&nbsp;



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1001" height="787" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg" alt="" class="wp-image-5422" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=1001 1001w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=327 327w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=332 332w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=279 279w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/coindesk-research-bitcoin-ether-diverged.jpg?w=80 80w" sizes="(max-width: 1001px) 100vw, 1001px" /><figcaption>Source: CoinDesk Reserach </figcaption></figure>



As for DeFi, like ether’s gains, it posted growth with the total locked-in value increasing by 13% during the quarter.&nbsp;



“It&#8217;s only the fourth time since ETX inception in the fourth quarter of 2016 that ether and bitcoin have recorded mixed quarters, but quarterly returns for the two price indexes have diverged by more than 50 percentage points nine times since the first quarter of 2017,” the report said.



The report said that there’s still a correlation between bitcoin and ether, but it&#8217;s slipping, coming in at 0.75.&nbsp;&nbsp;



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="715" height="562" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg" alt="" class="wp-image-5421" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=715 715w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=327 327w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=332 332w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=279 279w, https://blockworks-co.imgix.net/wp-content/uploads/2021/07/CoinDesk-research-defi-report.jpg?w=80 80w" sizes="(max-width: 715px) 100vw, 715px" /><figcaption>Source: CoinDesk Research </figcaption></figure>



It’s not about DeFi’s outperformance of bitcoin, but rather “eth’s outperformance of DeFi,” explained CoinDesk Research analyst Christine Kim in an interview with Blockworks.



“In a crypto winter, more investors and traders are fueled to search for yield in a very yield-scarce environment. People are going to look for ways to put their assets to work to secure some kind of a return on their investment,” Kim told Blockworks. “And that&#8217;s where the DeFi ecosystem really helped to step in with various protocols and applications, which are lending markets as well as decentralized exchanges.”



Kim said that this quarter’s notable divergence strengthens the weakened correlation between these two crypto assets.&nbsp;



“Very <a href="https://cms.blockworks.co/ethereum-more-than-just-a-currency/" target="_blank" rel="noreferrer noopener">different value propositions</a>, investment narratives,” she said.&nbsp;



But that’s not to say that ether, as a currency, doesn’t have competition. While much has <a href="https://cms.blockworks.co/ethereums-role-in-a-multi-chain-future/" target="_blank" rel="noreferrer noopener">been reported about alternatives</a> to Ethereum, the blockchain, Kim sees many emerging ERC-20 (the type of token used on Ethereum) tokens competing as stores of value.&nbsp;



“One of the things that will be interesting to watch in the upcoming quarter is the makeup of crypto assets locked in DeFi,” Kim said. “We’re starting to see a lot of different types of tokens in use.”



One of those alternatives is <a href="https://www.gemini.com/cryptopedia/wbtc-what-is-wrapped-bitcoin#section-what-is-w-btc" target="_blank" rel="noreferrer noopener">tokenized bitcoin</a>, ERC-20 tokens on the Ethereum blockchain that represent bitcoin stored in trust.&nbsp;



“In a bear market, there&#8217;s going to be potentially more holders of Bitcoin looking to secure gains by using their bitcoin and transferring it to the Ethereum-based DeFi market,” Kim said. “That&#8217;s a huge avenue for liquidity, and a huge liquidity surge that could be potentially forthcoming to DeFi.”



And this liquidity surge, Kim argues, will bring further legitimacy to DeFi and Ethereum all while fueled by bitcoin’s use as a store of value — even when it&#8217;s <a href="https://cms.blockworks.co/wrapped-crypto-tokens-and-why-theyre-critical-to-markets/">wrapped in Ethereum</a>.