What are Discreet Log Contracts? Using Bitcoin for DeFi

DeFi has attracted significant attention over 2020 as hundreds of projects on Ethereum have emerged at the intersection of blockchains and open financial instruments ranging from collateralized stablecoins to derivatives products.

While much more feasible at this point on a smart contracts platform like Ethereum, the notion of decentralized finance does not explicitly exclude bitcoin from the broader implications of DeFi products on the legacy cryptocurrency’s network.

Although not expressly DeFi, as they are hybrid instances of blending crypto assets and conventional financial structures, companies like BlockFi already offer borrowing and lending with bitcoin.

Similarly, sidechains (e.g., RSK) may eventually furnish the type of smart contract capabilities, similar to ethereum, that can enable more sophisticated financial products built on bitcoin.

However, there are some other intriguing takes on extending bitcoin’s protocol to more advanced financial applications, and specifically, one interesting proposal that has gained traction over the last couple years is called discreet log contracts.

Why Use Bitcoin for DeFi?

Approaching DeFi applications on bitcoin is somewhat precarious. For example, significant value underscores the proposition that bitcoin’s simple, stripped-down design is an enormous advantage for its long-term sustainability and robustness.

Many core bitcoin proponents view the OP_RETURN function for arbitrary data storage as unnecessary, citing the ability to deposit non-transaction information into the blockchain as opening additional attack incentives.

Interestingly, OmniLayer, which uses opcode space for identifier payloads, was a core component of the stablecoin Tether’s initial iteration before expanding to ethereum using ERC-20.

Conversely, concepts like bitcoin’s lightning network (LN) have presented an entirely new design space for bitcoin. Via layered scaling, applications can be created on top of bitcoin’s core protocol that do not…

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