Discussion on the Technical Principles and Optimization Ideas of DLC

DLC(Discreet Log Contract) is a smart contract execution scheme based on oracles, proposed by MIT's Tadge Dryja in 2018. It allows both parties to make conditional payments based on predetermined conditions, providing strong privacy and flexibility. Compared to the Lightning Network, DLC has significant advantages in complex financial contracts and reducing counterparty risk.

The basic principle of DLC is: both parties pre-sign a series of potential outcome transactions, and when the oracle signs to confirm the result, the corresponding transaction can be executed. This mechanism enables decentralized financial applications on Bitcoin while ensuring the safety of funds.

However, there are also some issues with DLC that need to be addressed:

1. The key management risks of oracle
2. Centralized Trust Risks of Oracles
3. Decentralized oracles cannot perform key derivation.
4. Oracle Node Collusion Risk
5. Fixed denomination limit for contract execution transactions

To address these issues, the following optimization measures can be taken:

1. Use BIP32 to derive child keys, enhancing key security.
2. Implement decentralized oracles using Schnorr threshold signatures
3. Design a distributed key derivation scheme to achieve the coupling of decentralization and key management.
4. Introduce the OP-DLC mechanism to achieve trust minimization of oracles through on-chain challenges.
5. Combine BitVM to build a dual bridge mechanism to solve the fixed denomination issue.

Through these optimizations, the security, reliability, and flexibility of DLC can be significantly enhanced, bringing more possibilities to the Bitcoin ecosystem. In the future, DLC is expected to integrate with technologies such as Taproot and BitVM to achieve more complex off-chain contract verification and settlement.