DLCs Evolving To Meet Institutional Needs

Introduction

Discreet Log Contracts (DLCs) have been around since 2017, when Thaddeus Dryja, co-creator of the Lightning Network protocol, proposed this concept. DLCs are smart contract structures that aim to address three key issues with previous contract schemes: scalability, data integration, and user privacy.

Scalability and Contract Footprints

The scalability of smart contracts was a major concern before the introduction of DLCs. These contracts required larger on-chain footprints to accommodate a wider range of potential outcomes. DLCs solved this problem by implementing a simple scheme. Two parties create a multisig address and select an oracle. They then create Contract Execution Transactions (CETs) that interact with the oracle. For example, if the oracle announces the price of Bitcoin, the participants can place bets on the price. The oracle publishes commitments to the messages it will sign to announce the price. Each CET is encrypted using adapter signatures, and the signatures can only be decrypted using information from the signed oracle message. This ensures the privacy of users and allows for efficient settlement of the contract.

Data Integration and Oracles

Prior to DLCs, getting external data into the blockchain for contract settlement was a challenge. DLCs solved this issue by utilizing oracles. Oracles publish commitments to messages for the data they are responsible for. Participants in the DLC can use this information to make informed decisions. The use of oracles also ensures that the oracles themselves have no insight into the identities of the participants using them, further enhancing privacy.

Trust and Oracle Behavior

One important distinction between DLCs and traditional escrow multisig contracts is how oracles can impact the settlement process. In the escrow model, an oracle can selectively harm a user by signing for an improper settlement. However, in the DLC model, oracles cannot act maliciously towards a single party because they don't know who is using them. When an oracle signs a message, it is used to settle every DLC connected to that message and time.

Coordination Challenges

While DLCs offer significant advantages, they also present coordination challenges. Depending on the nature of the contract, there could be a large number of CETs to cover all potential outcomes. This can lead to network issues and potential DoS attacks. Another challenge is the potential for a free option problem, where a party with the complete funding signature chooses not to broadcast it. This can be mitigated with on-chain transactions.

Introducing DLC Markets

LN Markets, a leading player in the DLC space, has developed a new DLC specification tailored towards institutional actors. The existing DLC projects have primarily focused on retail consumers, leaving room for modifications to meet the needs of larger institutions.

Addressing Institutional Needs

LN Markets' DLC specification addresses key issues faced by institutional customers. One issue is the free options problem, which is unacceptable in an institutional environment. The lack of margin calls and the need for efficient capital utilization are also important considerations for institutions.

The Role of DLC Coordinators

To address these issues, LN Markets introduces the concept of a DLC coordinator. Instead of direct peer-to-peer coordination, the coordinator facilitates contract negotiations. This eliminates the free options problem as the coordinator holds the necessary signatures for funding the contract. The coordinator is incentivized to submit the funding transaction by including a fee payment.

Efficient Coordination Process

The involvement of a coordinator also streamlines the coordination process. Participants can register an xpub and UTXOs with the coordinator, along with their contract terms. When someone accepts an existing offer, the coordinator has all the information needed to construct CETs. The coordinator provides the CETs to the accepting party for verification and signing. The original offerer then verifies and signs the CETs upon accepting the counterparty. The coordinator combines the signatures and submits the funding transaction.

Liquidations and Additional Margin

The coordinator's involvement also enables reliable communication for handling liquidations and adding additional margin. Special settlement transactions are included for periods leading up to the contract expiry. If the price is outside the contract range at any of these liquidation points, the contract can be settled earlier. The coordinator facilitates the coordination of adding margin and allows parties to withdraw funds if one is under-collateralized. This dynamic improves liquidity management and ensures contracts can adapt to changing market conditions.

The Potential Impact

Although the modifications to DLC specifications may seem small, they have the potential to significantly expand the use cases of DLCs. By addressing the needs of institutional investors and pools of capital, DLCs can become a powerful tool in capital and financial markets' use of Bitcoin. Just as the Lightning Network revolutionized transactional use of Bitcoin, DLCs have the potential to do the same for capital markets.

Conclusion

While this proposal may not be the primary use case for everyone, it is crucial to recognize its potential for growth and its ability to meet the needs of larger economic actors. As an open system, Bitcoin allows for innovation and the development of diverse use cases. DLCs tailored for institutional needs exemplify the versatility of Bitcoin as a financial instrument.

Frequently Asked Questions

Are gold investments a good idea for an IRA?

Anyone who is looking to save money can make gold an excellent investment. It's also a great way to diversify your portfolio. But gold has more to it than meets the eyes.

It has been used as a currency throughout history and is still a popular method of payment. It is often called “the most ancient currency in the universe.”

Gold is not created by governments, but it is extracted from the earth. It is very valuable, as it is rare and hard to create.

The supply and demand factors determine how much gold is worth. The strength of the economy means people spend more, and so, there is less demand for gold. Gold's value rises as a result.

On the flip side, people save cash for emergencies and don't spend it. This causes more gold to be produced, which lowers its value.

This is why both individuals as well as businesses can benefit from investing in gold. If you have gold to invest, you will reap the rewards when the economy expands.

In addition to earning interest on your investments, this will allow you to grow your wealth. You won't lose your money if gold prices drop.

Is buying gold a good option for retirement planning?

While buying gold as an investment may seem unattractive at first glance it becomes worth the effort when you consider how much gold is consumed worldwide each year.

Physical bullion bars are the most popular way to invest in gold. You can also invest in gold in other ways. The best thing to do is research all options thoroughly and then make an informed decision based on what you want from your investments.

If you're not looking to secure your wealth, it may be worth considering purchasing shares in mining equipment or companies that extract gold. If you need cash flow from an investment, purchasing gold stocks is a good choice.

ETFs are an exchange-traded investment that allows you to gain exposure to the market for gold. You hold gold-related securities and not actual gold. These ETFs can include stocks of precious metals refiners and gold miners.

Can I keep a Gold ETF in a Roth IRA

Although a 401k plan might not provide this option, you should still consider other options like an Individual Retirement Account (IRA).

A traditional IRA allows for contributions from both employer and employee. An Employee Stock Ownership Plan (ESOP) is another way to invest in publicly traded companies.

An ESOP is a tax-saving tool because employees have a share of company stock as well as the profits that the business generates. The money invested in the ESOP is then taxed at lower rates than if it were held directly in the hands of the employee.

You can also get an Individual Retirement Annuity, or IRA. You can make regular payments to your IRA throughout your life, and you will also receive income when you retire. Contributions to IRAs can be made without tax.

What is a Precious Metal IRA and How Can You Benefit From It?

A precious metal IRA allows you to diversify your retirement savings into gold, silver, platinum, palladium, rhodium, iridium, osmium, and other rare metals. These rare metals are often called “precious” as they are very difficult to find and highly valuable. These metals are great investments and can help protect your financial future from economic instability and inflation.

Bullion is often used for precious metals. Bullion refers actually to the metal.

You can buy bullion through various channels, including online retailers, large coin dealers, and some grocery stores.

An IRA for precious metals allows you to directly invest in bullion instead of purchasing stock shares. This allows you to receive dividends every year.

Precious Metal IRAs don’t require paperwork nor have annual fees. Instead, your gains are subject to a small tax. Plus, you get free access to your funds whenever you want.

How is gold taxed by Roth IRA?

A tax assessment for an investment account will be based on the current market value, and not what you paid initially. All gains, even if you have invested $1,000 in a mutual funds stock, are subject to tax.

You don't pay tax if you have the money in a traditional IRA/401k. Capital gains and dividends earn you no tax. This applies only to investments made for longer than one-year.

These accounts are subject to different rules depending on where you live. In Maryland, for example, withdrawals must be made within 60 days of reaching the age of 59 1/2 in order to qualify. Massachusetts allows you up to April 1st. And in New York, you have until age 70 1/2 . To avoid penalty fees, it is important to plan and take distributions in time to pay all your retirement savings.

How Do You Make a Withdrawal from a Precious Metal IRA?

First, determine if you would like to withdraw money directly from an IRA. Then make sure you have enough cash to cover any fees or penalties that may come with withdrawing funds from your retirement plan.

If you are willing to pay a penalty for early withdrawal, you should consider opening a taxable brokerage account instead of an IRA. This option is also available if you are willing to pay taxes on the amount you withdraw.

Next, you need to determine how much money is going to be taken out from your IRA. This calculation is dependent on several factors like your age when you take the money out, how long you have had the account, and whether or not your plan to continue contributing.

Once you know what percentage of your total savings you'd like to convert into cash, you'll need to determine which type of IRA you want to use. Traditional IRAs let you withdraw money tax-free after you turn 59 1/2, while Roth IRAs require you to pay income taxes upfront but allow you access the earnings later without paying any additional taxes.

Finally, you'll need to open a brokerage account once these calculations are completed. A majority of brokers offer free signup bonuses, as well as other promotions, to get people to open accounts. It is better to open an account with a debit than a creditcard in order to avoid any unnecessary fees.

When it comes time to withdraw your precious metal IRA funds, you will need a safe location where you can keep your coins. Some storage facilities will take bullion bars while others require you only to purchase individual coins. Before choosing one, consider the pros and disadvantages of each.

Bullion bars are easier to store than individual coins. However, each coin will need to be counted individually. You can track their value by keeping individual coins.

Some prefer to store their coins in a vault. Some prefer to keep them in a vault. You can still enjoy the benefits of bullion for many years, regardless of which method you choose.

Statistics

This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (smartasset.com)
Contribution limits$6,000 (49 and under) $7,000 (50 and up)$6,000 (49 and under) $7,000 (50 and up)$58,000 or 25% of your annual compensation (whichever is smaller) (lendedu.com)
Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (aarp.org)
(Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)

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How To

Investing in gold vs. investing in stocks

It might seem risky to invest in gold as an investment vehicle these days. The reason behind this is that many people believe that gold is no longer profitable to invest in. This belief is due to the fact that many people see gold prices dropping because of the global economy. They believe they would lose their money if they invested gold. In reality, though, gold investment can offer significant benefits. Here are some examples.

The oldest form of currency known to mankind is gold. It has been in use for thousands of year. It was used by many people around the globe as a currency store. Even today, countries such as South Africa continue to rely heavily on it as a form of payment for their citizens.

It is important to determine the price per Gram that you will pay for gold when making a decision about whether or not to invest. When looking into buying gold bullion, you must decide how much you are willing to spend per gram. If you don't know your current market rate, you could always contact a local jeweler and ask them what they think the price is.

It is also worth noting that although gold prices have declined recently, the cost of producing gold has increased. Although gold's price has fallen, its production costs have not.

The amount of gold that you are planning to purchase is another important consideration when deciding whether or not gold should be bought. If you intend to only purchase enough gold to cover your wedding rings it may be a smart decision to not buy any gold. If you plan to do so as long-term investments, it is worth looking into. It is possible to make a profit by selling your gold at higher prices than when you purchased it.

We hope you have gained a better understanding about gold as an investment tool. We recommend you do your research before making any final decisions. Only then can informed decisions be made.

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By: Shinobi
Title: DLCs Evolving To Meet Institutional Needs
Sourced From: bitcoinmagazine.com/technical/dlcs-evolving-to-meet-institutional-needs
Published Date: Wed, 14 Feb 2024 19:01:37 GMT