What's wrong with DLCFDs?

[antidamnation]

I recently read about something called DLCFD: Discreet Log Contract for Difference, which aims to stabilize Bitcoin's price. However, I haven't seen much interest in it. Some people have implemented it, like ItchySats, but I don't understand why no one seems to care! It benefits both parties involved—the one betting on the price and the one getting a stabilized Bitcoin. I know there's a trust issue with the oracles, but there are ways to handle that too. Sorry if this is a dumb question, I'm just a newbie trying to figure it all out.

[tranthidung]

I recently read about something called DLCFD: Discreet Log Contract for Difference, which aims to stabilize Bitcoin's price.

Bitcoin is a Proof of Work (PoW), mineable blockchain and you can not have smart contracts with interaction of Oracle to stabilize its price. With altcoins, you can but there are complicated mechanism and many factors that can affect the price. Oracle is not like a magic stick to do everything. When it works, you can see it magical but when it fails, you will see nightmare and death spiral too.

However, I haven't seen much interest in it. Some people have implemented it, like ItchySats, but I don't understand why no one seems to care!

It's my first time I have ever known of ItchSats, is it a project you're working with as a content creator or brand shiller?

Initially I feel it like this, and did not want to reply your post but let's buy benefit of the doubt.

[antidamnation]

first of, thanks a lot for your reply.

you can not have smart contracts

So are you suggesting that this whole DLC thing is a scam or something along those lines?

when it fails

sorry as I said I'm just a newbie trying to figure it. I should probably read a lot more. but I thought there are ways to use multiple Oracles so that doesn't become a nightmare.

and no I don't have anything to do with ItchySats, actually this was my own(possibly terrible) idea, when I searched, that came to my attention.

[348Judah]

Don't get him wrong OP, what he is trying to let you know is that bitcoin price cannot be stabilized with the use of PoW, same way we cannot change this as well from PoW to PoS, never expect that bitcoin price get stabilize, what we are considering about bitcoin is the fact that it's a volatile digital currency and in this are many getting their own respective opportunities in it for their profitable investment and adoption, no system, network or program that can centralized bitcoin or stabilizes its prize.

[Faisal2202]

Don't get him wrong OP, what he is trying to let you know is that bitcoin price cannot be stabilized with the use of PoW, same way we cannot change this as well from PoW to PoS, never expect that bitcoin price get stabilize, what we are considering about bitcoin is the fact that it's a volatile digital currency and in this are many getting their own respective opportunities in it for their profitable investment and adoption, no system, network or program that can centralized bitcoin or stabilizes its prize.

You are right it can't be stabilized, as a matter of fact, nothing in the world is stabilized anymore. But some are less volatile while some are more. BTC is highly volatile because its decentralized, and its price is influenced by demand and supply, and the fear and greed among people. If people think its buying time or to fill their bags, eventually its price will increase, and once they think collectively that its selling time the price will decrease.

This factor makes it highly volatile incompared to fiats because the demand and supply of fiats can be managed by the government with certain fiscal policies but some are failed to do that either and there local currency is now out of there hands due to there own vulnerable policies. In short, you will find a lot of fiat currencies as well, which are highly volatile.

[davis196]

I recently read about something called DLCFD: Discreet Log Contract for Difference, which aims to stabilize Bitcoin's price. However, I haven't seen much interest in it. Some people have implemented it, like ItchySats, but I don't understand why no one seems to care! It benefits both parties involved—the one betting on the price and the one getting a stabilized Bitcoin. I know there's a trust issue with the oracles, but there are ways to handle that too. Sorry if this is a dumb question, I'm just a newbie trying to figure it all out.

You "read something" but you don't provide link to the source of information. Why?
A contract for a difference(or CFD) is term from the financial markets. Trader A and Trader B make a CFD about an asset with a base price of 100. When the asset price does from 100 to 130, trader A pays 30 units to Trader B. If the asset price drops down from 100 to 70, trader B pays 30 units to trader A. This is the most oversimplified way for me to explain this. It's basically a way for some traders to hedge the risk of drastic price movements. I don't know anything about "discreet log" contracts for a difference and I don't know anything about this ItchySats project. OP, perhaps you could elaborate more on what you know about ItchySats.

[antidamnation]

You "read something" but you don't provide link to the source of information. Why?
A contract for a difference(or CFD) is term from the financial markets. Trader A and Trader B make a CFD about an asset with a base price of 100. When the asset price does from 100 to 130, trader A pays 30 units to Trader B. If the asset price drops down from 100 to 70, trader B pays 30 units to trader A. This is the most oversimplified way for me to explain this. It's basically a way for some traders to hedge the risk of drastic price movements. I don't know anything about "discreet log" contracts for a difference and I don't know anything about this ItchySats project. OP, perhaps you could elaborate more on what you know about ItchySats.

The below link was the best I could find about DLC:
https://river.com/learn/terms/d/discreet-log-contract-dlc/

I don't know much about ItchySats, I think they've just implemented the idea.

[antidamnation]

This factor makes it highly volatile incompared to fiats because the demand and supply of fiats can be managed by the government with certain fiscal policies but some are failed to do that either and there local currency is now out of there hands due to there own vulnerable policies. In short, you will find a lot of fiat currencies as well, which are highly volatile.

I get it. I'm well aware of Oracle's trust issues. But think about it: there are folks out there betting on Bitcoin's long-term price, and people in high-inflation countries who crave stable digital money. This got me thinking—there's a real opportunity here for both sides!

[d5000]

In contrast to most others in this thread I do consider DLCs an interesting technology. There was some buzz 1-2 years ago about it but it seemed then the euphoria died down a bit.

There was a thread here last year and I opened one in Spanish but not much interest has been shown.

Discreet Log Contracts (and in particular DLCFDs) are not so much about stabilizing the Bitcoin price but about giving people the possibility to hedge against price swings, similar to options. Basically there is one party who wants to leverage their long position and the other party who wants to get a stable value, renouncing to profit from price swings.

Just synthetizing the concept:

- Alice wants a stable price, Bob wants to leverage the position, Carol is an oracle knowing the current price in USD. So they agree on a contract that, when the contract expires (e.g. after 30 days), Alice will receive Bitcoins for the same value in USD than at the contract's start, while Bob will receive the remaining coins (minus a fee for Carol). If Bitcoin goes up, Bob will receive more Bitcoins.
- Alice and Bob create an address with a Bitcoin Script contract which includes a signature from Carol (see below) and transfer funds F to it, in the simplest case 50% of the funds are provided by Alice and 50% by Bob.
- Then Alice and Bob sign several off-chain transactions where the funds get divided, after expiration, according to a proportion like the terms of the contract, i.e. where Alice always receives the same value in USD, for different Bitcoin prices (e.g. for a price of 50k, 51k, 52k ... up to 80k).
- Once the deadline arrives Carol (the oracle) provides a signature which corresponds to the proportion which distributes the funds correctly for the current Bitcoin price. i.e. where Alice gets a BTC amount which corresponds to the USD value of her initial transfer to the multisig address.

Carol has to be trusted to not cooperate neither with Alice nor Bob, otherwise she could provide a signature for the "wrong" price. But Carol can't steal funds.

Why are these contracts not more popular? I honestly don't know. It's possible that the high on-chain fees in the last year have delayed their acceptance. But these contracts are also possible using Lightning - however Lightning currently is also stagnating.

Bitcoin is a Proof of Work (PoW), mineable blockchain and you can not have smart contracts with interaction of Oracle to stabilize its price.

In Discreet Log Contracts, the oracle does not have any direct incidence on the Bitcoin price (like in Dai for example). Its function is to "post" the current Bitcoin price so the two parties who engage in the DLC can settle their contract. But it's a purely private contract between two parties, see above

[Faisal2202]

I get it. I'm well aware of Oracle's trust issues. But think about it: there are folks out there betting on Bitcoin's long-term price, and people in high-inflation countries who crave stable digital money. This got me thinking—there's a real opportunity here for both sides!

As d5000 explained with examples Carol the middleman has to be trusted although she can't steal the funds but can disrupt the deal. Besides this trust issue, I don't think there is a need for anything else to conclude that why this has not been implemented already. And speaking of fold who are betting on Bitcoin's long-term price, which I think is not a bet because it is totally based on analysis, and people who have a strong desire for stable digital money, they can use any for example USDT, and there are dozens of other stable digital currencies that they can use and can easily make such deal/contracts.

Why do you think people are craving for digital currencies and help me understand how this is going to help people betting on Bitcoin's long-term price.

[antidamnation]

- Alice wants a stable price, Bob wants to leverage the position, Carol is an oracle knowing the current price in USD. So they agree on a contract that, when the contract expires (e.g. after 30 days), Alice will receive Bitcoins for the same value in USD than at the contract's start, while Bob will receive the remaining coins (minus a fee for Carol). If Bitcoin goes up, Bob will receive more Bitcoins.
- Alice and Bob create an address with a Bitcoin Script contract which includes a signature from Carol (see below) and transfer funds F to it, in the simplest case 50% of the funds are provided by Alice and 50% by Bob.
- Then Alice and Bob sign several off-chain transactions where the funds get divided, after expiration, according to a proportion like the terms of the contract, i.e. where Alice always receives the same value in USD, for different Bitcoin prices (e.g. for a price of 50k, 51k, 52k ... up to 80k).
- Once the deadline arrives Carol (the oracle) provides a signature which corresponds to the proportion which distributes the funds correctly for the current Bitcoin price. i.e. where Alice gets a BTC amount which corresponds to the USD value of her initial transfer to the multisig address.

Can multiple oracles be used to mitigate the risk, or is it limited to a single oracle per contract?

[antidamnation]

Discreet Log Contracts (and in particular DLCFDs) are not so much about stabilizing the Bitcoin price

but in theory it's possible to implement such a mechanism. Am I right?

[antidamnation]

They can use any for example USDT, and there are dozens of other stable digital currencies that they can use and can easily make such deal/contracts.

Why do you think people are craving for digital currencies and help me understand how this is going to help people betting on Bitcoin's long-term price.

They can't use stablecoins like USDT because of the risk of being blocked by a central authority, which is especially problematic for people in sanctioned countries. Physical dollars aren't a good option either, as governments can restrict their circulation.
Additionally, since Bitcoin's price tends to rise over the long term, Alice is more likely to gain value from the contracts compared to just holding Bitcoin.

[d5000]

Can multiple oracles be used to mitigate the risk, or is it limited to a single oracle per contract?

Yes, this would in theory be definitely possible, because you could require more than one oracle signature in the contract. In the DLC whitepaper on page 6 the implications are explained: It is possible that the oracles disagree by a few dollars about the price and then the contract becomes invalid. For example, one oracle could provide the signature for a price of 60000 $ and another one for 59990$. This depends how fine the granularity of the contract is.

This does of course not mean that the coins are lost, but they would be then returned to the owners with a timelocked branch of the transaction in the original proportion.

I guess you could however for example require 10 oracles and if 6 of them agree on the price then the contract becomes valid. This would minimize the risk, the transactions would be bigger but if everything is arranged via LN this does not matter.

but in theory it's possible to implement such a mechanism. Am I right?

No, in the case of Bitcoin this is not possible, not even for Ethereum itself (=the Ether currency). As I wrote, DLCs are simply agreements between two parties. The party in the "short position", i.e. the party requiring a stable value (Alice in my example) would be able to preserve the value of their coins, but with the cost of not benefitting from a possible price upside.

You could however create a token based on the CFD (contract for difference) concept on a turing complete smart contract platform like Ethereum. This was to my knowledge first implemented with the BitShares platform in 2014 or 2015, and Dai now also uses a similar mechanism.

[peter0425]

I recently read about something called DLCFD: Discreet Log Contract for Difference, which aims to stabilize Bitcoin's price. However, I haven't seen much interest in it. Some people have implemented it, like ItchySats, but I don't understand why no one seems to care!

I don’t think it’s that no one cares but rather it is too complex that everyone is being driven away. Its complexity offers many risks. It’s not exactly the simplest thing to do just implementing DLCFD. Not everyone in the bitcoin community is tech savvy and until DLCFD remains too much to understand for the common people, it will not be adapted by said common people.

It benefits both parties involved—the one betting on the price and the one getting a stabilized Bitcoin. I know there's a trust issue with the oracles, but there are ways to handle that too.

The risk of failure and manipulation is still quite high despite the many ways one can think of to finally solve oracle reliability. It is very much vulnerable to attacks especially that it relies on centralized databases.

[antidamnation]

Dai now also uses a similar mechanism.

I’ve been thinking about the Dai stablecoin and how it maintains its value through over-collateralization. Normally, a single user locks up more crypto collateral than the value of the Dai they generate. But what if two parties could collaborate on this?

Here’s the idea:

Party A wants to use Dai as a currency and puts up $100 worth of collateral.
Party B provides an additional $50 worth of collateral to ensure over-collateralization.
In this setup, if the price of the collateral goes up, Party B benefits from the increased value. Could this kind of collaboration work within the current MakerDAO system? Is there any other system implementing it? And if not is it possible to implement such a system?

[franky1]

the reason bitcoins volatility cant stabilise is due to PoW.. more specifically the worldwide cost differences between mining

for instance right now icelandic/slavic countries can mine 1btc for $48k we call this the base VALUE cost of world mining
for instance right now pacific island countries can mine 1btc for $400k we call this the top cost PREMIUM of world mining

the market price swings inbetween that window.. depending on who enticed to buy and sell and who and why and where they are from

in 2021-2022 the window was between 15k-75k which is why the markets tested the tops and bottoms of that window

right now we have some whale traders causing walls to keep the price below $75k(so that their bot algos can continue to function) until next years ATH season, which can go upto the current $400k premium should there be enough world wide traders willing to buy to the top

people in pacific islands that can only mine at $400k cant profit from mining so they are the willing buyers that will buy at any price as its cheaper than mining so they are the happy traders willing to bring the price up..
people in icelandic/slavic countries can mine real cheap so willing to sell cheap so they are happy to sell and keep the price down while still profiting

in short due to bitcoin being a world wide currency with different costs for different regions means different sentiments of willingness to buy/sell at different levels the market can fluctuate.

this topics concept of special contracts CANNOT work for bitcoin unless they close off lock coins of geolocation trading to regions whereby regions can only trade within themselves and not globally.. if there was a regional lock then prices within the region can stabilise but only if those traders had no access to the wider price ranges of global trade.. EG pacific islands stuck trading only between themselves would see them able to stabilise their allotments of coins between each other at a premium range of the window due to their dynamics.. where as icelandic/slavic countries would have cheap bitcoin costs circulating in their locked markets.. however the world market would still be variant if there was a world market still existing

other coins/tokens that have no real production/mining/minting/staking cost.. can be manipulated to be stable as they have no real world underlying value/premium effects affecting the market and so people can play with their market using contracts and agreements and do anything without it affecting real world costs and users.

[d5000]

the reason bitcoins volatility cant stabilise is due to PoW.. more specifically the worldwide cost differences between mining

Disagree here fundamentally. Mining cost differences are irrelevant imo, because the BTC price is caused by supply/demand dynamics. The supply increase by miners is fairly static, even if hashrate went down 50% in a few weeks because many miners couldn't afford the "cost" of mining anymore, the block creation would stabilize again due to the difficulty mechanism, so there would only be a negligible effect on the coin supply - this is even more the case as the miners' supply currently is less than 0.5% of the total supply on the market.

PoS coins are equally volatile. You could argue that they follow Bitcoin's price, but that's not always so. They have their own boom bust cycles.

What is true is that the PoW mechanism doesn't allow a "flexible" supply like it would be necessary for a "stability mechanism" in the vein of Dai or Bitshares. This would need not only a more flexible block reward but also a kind of permanent burning mechanism, like in the Basecoin concept.

But Bitcoin's stabilization could be achieved via other means, mainly increased liquidity, which can potentially increase drastically if the scalability problem is solved and BTC can be used more comfortably as a currency for payments. Layer-2 or "subnetwork" development (LN, sidechains) would thus contribute to stability.

@antidamnation : I don't see that much a difference from how Dai currently works to your system. What would be the advantage? (In reality this should be discussed in the altcoin forum, as this can't be applied to BTC and is also not directly related to DLCFDs.)

[franky1]

the reason bitcoins volatility cant stabilise is due to PoW.. more specifically the worldwide cost differences between mining

Disagree here fundamentally. Mining cost differences are irrelevant imo, because the BTC price is caused by supply/demand dynamics. The supply increase by miners is fairly static,

funnily you say supply is static while arguing the price is volatile.. thus.. wait for it... NO coincidence, correlation, consequence, causation can be found between the supply vs price

its not about the mining supply!!
is about the economic mentality/sentiment of assessing costs/profit even before mining or buying or spending or selling

for instance before even going on vacation.. you see 2 locations that are 5 star rated. both have a pool and offer inclusive meals.. but the costs are different.. the choice is then nothing about how many hotel rooms are vacant to be able to book(supply) nor is it about "omg they have been fully booked all year but now have a room we can rent so we must go book it before its gone"(demand).. people make choices for many other reasons outside of supply/demand of hotel vacancy/popularity

if people learning about bitcoin found out that they can only mine in the pacific islands at many hundreds of thousands.. they wont mine instead they would see it costs $XXXk to mine before even buying any asics.. and then see the market offers a wayyyyyy cheaper option. and they would happily buy from the market at the discount all the way up above old ATH should the market move in that direction. they would be the ones continuing to buy no matter what, and just not mine. because the market offers a good price compared to mining.. and i have not even mentioned about how many coins are on the market or are inside a mining pool ready to dish out to miners as a reward

if people learning about bitcoin found out that they can mine in the icelandic/slavic area cheaply at under $50k they would be the ones investing in hardware to mine. this then causes the hashrate to rise which causes other miners costs to rise due to competition whereby those that had costs of say $60k to then be pushed to $70k costs switching that middle group from mining, to become market buyers

and none of this is about mining supply of coin

also the whole "supply/demand" silly notion many were taught in kindergarden is bad math bad business education..
lack of supply does not = demand and abundance of supply does not mean less demand or less in price
there are more
for instance there is an abundance of iphones but there is a limited supply of nokia phones.. but that does not mean nokia wins the supply/demand game

there are many more layers to economics then the foolish simplicity of 'supply/demand'
actual cost of creation/original acquisition has more involved in setting the window range which the price sits within

its not a simple kindergarden "supply/demand" 2 word shout out.. there is many depths and levels that go into what effects the demands, and what affects supply and what effects economics outside of those 2 words

for instance not all 19.Xm are on the markets.. so the markets does not play to the whim of all coins in circulation.
there is also a matter about even if there was just 1m coins deposited on a market. the order amounts per price, the increments between orders and many other aspects affect the price

for instance
if we just had 20 coins on the sell side
4   $63750.00             4    $63750.00           19       $63750.00
4   $63749.99             4    $63747.00           0.25    $63749.99    
4   $63749.98     vs     4    $63744.00    vs    0.25    $63749.98
4   $63749.97             4    $63741.00           0.25    $63749.97
4   $63749.96             4    $63738.00           0.25    $63739.96

the 3rd column would be a bigger wall meaning the price may not even fill to empty all the 19 coins at 63.75k
the 2rd column would move coins price down to 63.738 faster than the 1st column which only moved down to 63,749.96 selling the same coins

yep 3 different price consequences even with the same market supply.. so its not about supply nor demand when there are 20 coins on supply/ and 20 coins on demand .. the prices change due to more then just supply/demand..

also
if there are people in the world willing and able to buy at higher prices than $64k due to having local mining costs known to be several hundred thousand.. the price has all possibilities to go up higher then current ATH
however smart traders using walls can prevent the price going up without needing to have huge whale supply by arbitrage marketing a small amount repeatedly in cycles to keep filling market orders to keep it from rising without needing any huge supply to sell off nor need to quash the demand..

there are many things beyond just shouting "supply/demand" like its some magic word you learned that makes you think you have learned he secret mythical knowledge of economics..

[fullhdpixel]

Don't get him wrong OP, what he is trying to let you know is that bitcoin price cannot be stabilized with the use of PoW, same way we cannot change this as well from PoW to PoS, never expect that bitcoin price get stabilize, what we are considering about bitcoin is the fact that it's a volatile digital currency and in this are many getting their own respective opportunities in it for their profitable investment and adoption, no system, network or program that can centralized bitcoin or stabilizes its prize.

You are right it can't be stabilized, as a matter of fact, nothing in the world is stabilized anymore. But some are less volatile while some are more. BTC is highly volatile because its decentralized, and its price is influenced by demand and supply, and the fear and greed among people. If people think its buying time or to fill their bags, eventually its price will increase, and once they think collectively that its selling time the price will decrease.

This factor makes it highly volatile incompared to fiats because the demand and supply of fiats can be managed by the government with certain fiscal policies but some are failed to do that either and there local currency is now out of there hands due to there own vulnerable policies. In short, you will find a lot of fiat currencies as well, which are highly volatile.

Bitcoin can experience stability but that is only sometimes and not permanently. Most assets in this world are not stable, which means there are still some who are. In the crypto world, we literally have stable cryptos here. I am referring to cryptos like Tether and USDC. Being decentralized can be one of the reasons on why Bitcoin is volatile because there is no one to regulate its price.

Another thing would be on why Bitcoin is highly volatile is due to its small and limited supply. Simply buying and selling, won't shake the price much but it must be done in larger volumes. I can only believe more if we are talking about whales here.