In the final pieces of our "Not Your Ordinary NFTs: An Exploration of Bitcoin Ordinals," we explore the future of the Ordinals protocol and more of the potential it can unlock for the Bitcoin blockchain.
The ability to track and inscribe arbitrary content on individual satoshis (sats, for short) to mint digital artifacts that live directly on the BTC chain has shifted everything from how we view wallets and marketplaces to how we interact with the mining ecosystem, Bitcoin blocks, and block space. Bitcoin Ordinal theory has also given us a glimpse into what is possible for Bitcoin DeFi and how our token transactions may work in the future.
But the Ordinals protocol is still new, meaning that the wider crypto and Web3 space still has much to explore in terms of the functionality of Ordinals and the Bitcoin-native digital artifacts that have come to define it. This also includes technology that would introduce more complex trades and transactions involving inscriptions.
We sat down with Aki Balogh, CEO and co-founder of DLC.Link, who took us through the possibilities that DLCs could unlock for the Ordinal inscriptions market, and how they can create new opportunities for the Ordinals market.
What are DLCs and What Can They Enable on the Bitcoin Network?
Trust Machines: Can you tell me a little bit about DLC.Link?
Aki: We build infrastructure that makes it easy for apps on any chain to integrate native Bitcoin into what they do. There's this open source invention called Discreet Log Contracts (DLCs). It was invented by Tadge Dryja, who co-created the Lightning Network. He published a white paper in 2018 laying out how DLCs can enable simple smart contracts to move native Bitcoin. What we do as a company is we educate others about DLCS and their advantages, we partner with companies that are looking to implement native Bitcoin into their systems, we partner with companies on various chains and we're building infrastructure that makes it easier for developers on these chains to build DLC capability into their apps.
Trust Machines: What would you say are the biggest benefits of DLCs?
Aki: There are two main benefits. [The first is that DLCs operate as] a completely trustless system. If you want to use Bitcoin on other chains, you either have to wrap it or bridge it. If you're wrapping it, you're entrusting it to a centralized custodian. If you're bridging it, you're trusting a set of validators. DLCs [basically enable you] to escrow Bitcoin on-chain in a decentralized way, and there are no validators involved.
The second benefit is that they're actually quite powerful. Although they are simple, they enable conditional payments on Bitcoin. So, for example, Party A and Party B enter a DLC, agree to some terms, and then when those terms come to pass [and when the] outcome is known, then Party A and Party B can be paid out in any of those pre-agreed on arrangements. It's also been called “make a bet,” so they make a bet or they enter into an agreement and when the reality is known, the payouts are automatically moved in Bitcoin. So it's just conditional payments on Bitcoin.
Once you lock your Bitcoin into a DLC, you know – with the certainty of the Bitcoin network – that either outcome A or B is going to happen, under what conditions [they will happen], and you can see it on the chain. As long as the Bitcoin chain doesn’t fail, the DLC is there.
How Can DLCs Affect Bitcoin Ordinal Inscription Transactions?
Trust Machines: Why have there been conversations around Ordinals and DLCs?
Aki: When you're looking at NFTs on the Ethereum network or Solana, they use smart contracts that let you move those NFTs around for trading or for lending and borrowing cases, [to name a few use cases]. When it comes to Ordinals, it's almost like the Ordinal is the base asset, it's the NFT. But when you want to trade it, borrow against it or do something else with it, you need some other technology. The original way that people were trading Ordinals was completely reliant on trust. And so, a DLC would basically [offer a programmable way] of implementing [trustless] trading and lending on Ordinals.
[A key differentiator] is that DLCs are fully programmable. You can program a DLC based on any kind of input or any kind of smart contract signal. So, for example, a lot of Bitcoin trading functions on HTLCs – hashed time locked contracts. You can program any number of parameters [on these HTLCs and other more] sophisticated logic because a DLC is really a way for a smart contract to interact with and move native Bitcoin.
Going back to Ordinals, if users are locking Bitcoin or inscriptions into DLCs, those DLCs can be used to programmatically [move inscriptions in more sophisticated ways]. You can have much more expressive applications using Ordinals with DLCs because of the capabilities there.
Trust Machines: What are the biggest barriers to integrating Ordinals and DLCs?
Aki: Every DLC system requires a couple of different components. The first is [that there needs to be] a DLC signing library embedded into the Bitcoin wallet that's being used. That library needs to be there for that wallet to actually create these conditional signatures. That should be possible sometime in April.
Once that library is in production, there needs to be what we call a Bitcoin oracle network, but it's really a DLC layer that can interpret smart contract commands, feed data, and create and close these DLC escrows. So, it's kind of a DLC facilitation layer that needs to exist. Right now, [DLC.Link provides that], but we do so in a smaller form. We're basically expanding that and making it a more robust layer to be embedded into smart contracts.
Trust Machines: So, once those challenges have been solved, what could we potentially do with DLCs and Ordinal inscriptions?
Aki: [DLCs could enable more] sophisticated ways of trading and conducting finance on Ordinals or DeFi. As an example, because DLCs could give people a way to build programmable logic to move Ordinals, if you have Ordinals that represent real world things – like the title of our home or some sort of financial asset – you’re going to want to use systems that can move that data around for various reasons, [and DLCs can help to enable that].
The current system is alright for where we are, but it can't really adapt to the more robust needs of using Ordinals for the practical applications like what you can already do with NFTs on Ethereum and Solana. That infrastructure is not there yet.