Intro
The core principles of the Side Finance lending protocol are straightforward:
Not your keys, not your coins: While BTC can be used as collateral to borrow other assets, the collateralized BTC cannot be arbitrarily spent by lenders under any circumstances unless liquidation occurs. The protocol enforces this principle by securing all BTC collateral in 2-of-2 multi-signature addresses, which require the borrower’s signature for any transaction. This ensures that the protocol offers a Bitcoin-native level of security to its users.
Alt-chain risk remains with alt-chain participants: No crypto loan system can entirely eliminate risk, especially when loan assets involve trusted entities, such as stablecoins (e.g., USDT). However, the protocol is designed to minimize economic risks for liquidity providers, ensuring a trust-minimized environment where risks are managed within the alt-chain ecosystem without adversely affecting borrowers.
Side Finance leverages established Bitcoin security technologies, including Schnorr-based Adapter Signatures, HTLCs, Taproot, and threshold signing, integrated with Discreet Log Contracts (DLCs) and secure distributed oracles. The combination of these technologies into Scriptless Scripts enables Side Finance to provide smart contract-like functionality on Bitcoin today, without requiring any changes to the underlying Bitcoin protocol’s opcodes.
Threshold Adaptor Signatures
Adapter signatures represent a significant cryptographic advancement that enhances the efficiency and privacy of conditional transactions within the Bitcoin network. These signatures serve as a bridge between standard signatures and concealed values, offering dual functionality:
They disclose a secret value when combined with the corresponding signature.
They generate the complete signature when presented with the secret value.
A notable feature of adapter signatures is their reusability: third parties can create secondary adaptors from the initial commitment, even without knowledge of the secret value. This characteristic renders them particularly effective for establishing conditional locks in Bitcoin contracts.
Traditionally, Bitcoin contracts employ hashlocks for conditional payments, ensuring atomicity across multiple transactions. While effective, hashlocks have certain limitations, including their on-chain storage footprint and the ability to link transactions that share the same hash across different blockchains.
Adapter signatures provide developers with greater flexibility, enabling the creation of more intricate conditional structures without increasing on-chain data requirements.
Discreet Log Contracts (DLCs)
At the heart of Side Finance’s infrastructure is the Discreet Log Contract (DLC), a sophisticated, oracle-based Bitcoin smart contract framework. DLCs allow for conditional payments based on off-chain events, all without involving a third-party custodian to manage funds.
These contracts leverage multiple cryptographic methods, including multi-signature transactions, Hash Time-Locked Contracts (HTLCs), Schnorr signatures, and adaptor signatures, ensuring the security and non-custodial nature of the system.
A DLC begins with a funding transaction that locks funds from two parties into a 2-of-2 multisignature output. Pre-signed Contract Execution Transactions (CETs) are created for different potential outcomes of the external event, but these CETs remain inactive until a real event outcome occurs.
The oracle, which is independent of the contract parties, publishes a public key or nonce at the contract’s initiation. Participants use this key to generate adaptor signatures for the CETs. When the oracle reveals the outcome by disclosing a signature, the participants can finalize the relevant CET and broadcast it to the Bitcoin network, redistributing the locked funds according to the contract’s terms.
DLCs provide a secure, trustless method to execute conditional payments and smart contract logic, pushing Bitcoin’s capabilities for DeFi applications.
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