​The DG Lab conglomerate​, one of the quietest but best-funded Bitcoin companies on the globe, is preparing to enter the 2020 decentralized finance (DeFi) bull run. Back in July, the conglomerate open-sourced its idea for self-sovereign derivatives trading on the Bitcoin blockchain with the help of the Lighting Network.

These contracts turn Bitcoin, the asset, into programmable money capable of a wider variety of functions. This comes as a clear contrast to the usual DeFi approach until now, which depends on ‘wrapped’ representations of Bitcoin or exchange platforms.

The Lightning Network

The Silicon Valley startup cLabs recently bought DeFi company Summa, which drove the Bitcoin-on-Ethereum concept. Now, it seems as though DG Lab, established in 2015, is the main holder exploring DeFi opportunities for Bitcoin.

“I’ve been working on a proposal to integrate DLC [Discreet Log Contracts] and channels into the Lightning Network,” DG Lab researcher Ichiro Kuwahara said of his recent work. “We can establish many contracts without broadcasting transactions on the blockchain.”

This software uses the Lightning Network to perform business logic without occluding the base-layer blockchain. The trend that goes around now among Bitcoin​ veterans is imagining DeFi functionality applied to the ​Bitcoin​ currency via such layers. There are numerous opinions on how to approach this chance, from DLC to soft forks.


However, not everyone is on the same page regarding the way Lightning is used for smart contracts. Bitcoin veteran Jeremy Rubin, who launched his Judica startup this summer, thinks that Blockstream’s Liquid Network, which firms like Crypto Garage employ to test with such smart contracts, over-complicates the structure.

“I think we can do it much simpler. … It’s solvable on-chain but can be done in [Lightning] channels as well,” Rubin said in an interview, details on how his idea of a Bitcoin soft fork could optimize the base layer for smart contracts. “I can construct this contract, which is a derivative, without you being online. I can make a valid contract then email it to you.

Currently, both ends of a Lightning transaction are required to participate at almost the same time for the payment to go through. Rubin is saying that there’s a way to make it so one party can perform a consensual transaction, as public keys enable the other party to see, when they are online, evidence of everything about the deal.

“It’s this notion of flow and conditionality that doesn’t currently exist in Bitcoin,” Rubin explained. “[These 2020 DeFi projects] are about helping define commutes … a sequence of steps that can happen based on choices along the way.”

There are sufficient engineers working on DeFi options for Bitcoin​ so one of them might actually function.

Different Aims

On another note, another startup called Crypto Garage is using Blockstream’s Liquid technology to test this kind of smart contract software.

“You define the outcomes of your contracts and create a transaction for each of the outcomes. And it can only be unlocked with one of the outcome transactions or with mutual agreement between the contract participants,” Crypto Garage engineer Thibaut Le Guilly said in an interview.

Although Rubin disagrees with Le Guilly on some aspects, these Bitcoin​ programs have much more in common with each other than with Ethereum DeFi projects.

“There’s a really big gap between DeFi, as Ethereum is trying to do it, and P2P finance,” Rubin said. “Uniswap is really great. But they tokenize their liquidity pools. … We [Bitcoiners] are talking about finding a way for people to work directly with each other.”

Bitcoin​ DeFi projects are not using proxies of Bitcoin​, as they want to allow traders to do tasks directly with Bitcoin​.

“There are about 20 people in the Bitcoin community working on tools, applications, and specifications for [Discreet Log Contracts], including at SuredBits,” Le Guilly said in an interview. “[Traders] don’t have to involve an exchange.”

Different Interpretation

It seems that Ethereum DeFi proponents come with a different interpretation of decentralization than their node-focused Bitcoiner sibling. Bison Trails CEO Joe Lallouz said that his infrastructure startup could easily transfer accounts across borders, mainly because of a distributed team. This, in his opinion, is a slightly decentralized step away from Silicon Valley standards.

“If Amazon said you can’t run nodes, for example, we can very quickly and seamlessly move our infrastructure to other cloud providers,” Lallouz said. “Everyone at the same time would have to say the blockchain network is something we don’t support [to censor our customers] across the internet.” 

Although Ethereum DeFi experiments bring in quick flashes of capital, losing huge amounts as advocates explain, Bitcoin​ DeFi experiments seem rather modest in comparison. Still, veterans know not to undervalue the Bitcoin​ development taking place in Tokyo, Japan, at the moment, as this period may just be the calm before a very powerful storm.

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