Bitcoin fixes money.
Thanks to Bitcoin, anyone in the world can freely transfer money over a peer-to-peer network without having to go through a financial institution. Money that cannot be censored by authorities, devalued by governments, monopolized by corporations or stopped at borders.
But when it comes to trading, it is still necessary to go through a trusted third party. Why is it a problem? Because trusted third parties have always been and continue to be security vulnerabilities.
Bitcoin trading stopped
Individuals and financial institutions rely on trusted third parties such as clearinghouses and exchanges to clear their Bitcoin spot and derivative transactions.
Does it look familiar? Yes, that is exactly what happened during the contagion event of 2022 when Celsius, Terra, Three Arrows Capital, BlockFi, Voyager, FTX and many others collapsed. Most of the time, end users who trusted these third parties lost everything.
Centralized exchanges are inherently insecure because funds can be pooled without any oversight. Trade and custody should never be mixed.
Looking at the list of bankruptcies above, one may feel helpless and declare that trading Bitcoin is prohibited. Instead, we looked again and asked ourselves: Does Bitcoin trading really need to take place on the books of a trusted third party? Certainly not. And Bitcoin itself provides the solution!
Bitcoin is a complex and dynamic system that has not yet found its balance, and no one can predict the ultimate role it will play. Defining Bitcoin is challenging because it cuts across multiple areas. Some see it as a financial asset, others 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 technical infrastructure. This technical dimension is the least visible, probably because of its relative complexity, but there we find one of the most fascinating aspects of this unidentified financial object (UFO).
And we are convinced that the Bitcoin protocol provides the ideal building blocks for the development of robust financial services.
Building the Future of Bitcoin Trading
Bitcoin’s code consists of operations that, when put together, form a script. This list of available basic operations has evolved over time, with new operations added to enable more complex scripts. This development is often slow, but this progressive pace helps maintain the protocol’s stability and security.
The simplest scenario is of course the peer-to-peer transfer of a unit of value. The first trading platforms were built with this functionality: it became possible to transfer money directly from a wallet to a processing platform.
Lightning Network is a program built from a more complex script. It allows for instant and risk-free transfer of BTC. LN Markets was the first trading platform to integrate this new protocol into its main development.
Aimed at the retail market, its value proposition is an extreme simplification of the trading experience: it takes only seconds for a user to manage everything from account creation to collateral, all instantly from one Lightning wallet. The value proposition of instant trading has generated a cumulative trading volume of over $2 billion.
Based on this success, it was only natural for us to turn our attention to discrete logging contracts. A DLC is a built-in “smart contract” built on Bitcoin that allows the delivery of a payment solely dependent on the publication of a price by an oracle.
Today, we believe it is time to leverage the DLC protocol to enable completely trustless trading and end the pooling of funds from trusted third parties.
Confidence in Bitcoin minimized trading is now a reality
Over the past few months, we’ve been stealthily building a trustless OTC derivatives trading platform designed to meet the needs of crypto-financial institutions: DLC Markets.
Any kind of financial instrument can be traded on DLC markets with almost no counterparty risk: Bitcoin futures and options, hashrate and blockspace products, and potentially any asset in the world.
Traditionally, transactions for institutions have always been centralized and standardized. At some point, a clearing house (CCP) takes control of the funds and manages the settlement. Paradoxically, despite technological advances, Bitcoin trading is much riskier than traditional trading: no regulation, trading and storage in the same place, conflicts of interest, numerous risks and frequent bankruptcies.
DLC Markets aims to solve these problems. With inspiration from traditional OTC trading, we are developing a marketplace where participants can meet and trade. Similar to an ISDA/CSA agreement, collateral is exchanged directly between peers.
To manage the payment, a smart contract (DLC) acts as a CCP. This smart contract is unique for each transaction and guarantees separate fund management, full transparency for transaction participants and confidentiality from external actors.
Market participants can discuss and submit bilateral requests for quotations (RFQs) to each other. Upon mutual agreement for a transaction, they confirm the transaction parameters and send the initial margin to a smart contract on the Bitcoin blockchain. Throughout the duration of the transaction, margin calls, liquidations and settlements can take place and unlock the corresponding result in the smart contract. The calculation of any settlement depends solely on the publication of an independent oracle.
The oracle is a trusted third party that allows certain events to be verified with precision. Unlike an escrow, the oracle is not responsible for interpreting or executing the contract. No express approval from the oracle is required to unilaterally establish or terminate the contract. The only requirement is the use of data regularly published by the oracle, which is both freely available and shareable.
Although traditional DLCs can be cumbersome to implement, we introduce a new approach with a coordinator to solve the free option dilemma when DLC launches. This approach also makes it possible to integrate margin calls, liquidation and netting into the DLC process.
For an in-depth technical analysis of our solution, see our white paper.
The future is now
DLC Markets represents a paradigm shift, providing a secure, trustless alternative to the centralized exchanges that have long dominated the financial industry. You can already sign up to try our beta!
To accelerate Bitcoin as infrastructure, we have completed a $3 million fundraising round led by ego death capital together with Lemniscap and Timechain, joining our existing investors Arcario, Bitfinex and Fulgur Ventures. We are very excited to partner with investors who share our belief that bitcoin-native companies will change the world.
Welcome to a new era of transparency, efficiency and resilience in derivatives trading.
More information: https://lnmarkets.com/ & https://dlcmarkets.com/