BA-11 · LESSON 05

DLCs

KEY DEFINITIONS

Terms used in this lesson

DLC: Discreet Log Contract: a Bitcoin contract whose settlement can depend on an oracle attestation.
Oracle: A system that reports outside information, such as a market price, for use by a protocol.
CET: Contract Execution Transaction: a prebuilt DLC payout transaction for one oracle outcome or range.
BIP340: The Bitcoin Improvement Proposal specifying Schnorr signatures for the secp256k1 curve.
Schnorr signature: Bitcoin’s Taproot signature scheme, whose algebra supports compact verification and advanced multi-party signing.
BTC: The common market ticker for bitcoin.
USD: United States dollar, the reference currency in a BTC/USD price.

Discreet Log Contracts use oracle attestations and adaptor signatures so outcomes settle without revealing the full contract logic on chain.

35 min Difficulty 3/5 Not started

VISUAL MODEL

See the whole mechanism before going step by step

Use the diagrams to orient yourself. Then the guided explanation below teaches every part in depth.

4 explanatory views

CONCEPT-SPECIFIC MAP · state machineOne valid action transforms a known stateSelect any state to inspect its exact role.

RELATIONSHIP MAPOrdered mechanism flow

01
BEFOREKnown state
Identify the facts and objects that exist before the action.
02
ACTIONDLCs
The DLCs lesson isolates the event that proposes a change.
03
RULEDeterministic check
The enforcing rule accepts or rejects the proposed transition.
04
AFTERSuccessor state
Accepted work creates a new state without silently changing the prior facts.
05
FAILUREState unchanged
A failed condition must not produce a partially accepted successor.

Rule shown: A valid transition names the prior state, action, enforcing rule, and successor state.

STAGE 1 OF 5BEFORE: Known state

Identify the facts and objects that exist before the action.

Governing relationship: A valid transition names the prior state, action, enforcing rule, and successor state. Complete path: 1. BEFORE, Known state. Identify the facts and objects that exist before the action. 2. ACTION, DLCs. The DLCs lesson isolates the event that proposes a change. 3. RULE, Deterministic check. The enforcing rule accepts or rejects the proposed transition. 4. AFTER, Successor state. Accepted work creates a new state without silently changing the prior facts. 5. FAILURE, State unchanged. A failed condition must not produce a partially accepted successor.

1. State transitionWhat exists, what changes, and what results

BEFORE

Two parties lock 12 illustrative contract units. Below $50,000 pays A 9 and B 3; $50,000 through $69,999 pays 6 each; $70,000 and above pays A 3 and B 9. Refund height is 300.

MECHANISM

Before the event, the oracle publishes public nonce commitments describing how it will attest possible outcomes.

AFTER

The oracle reports data but does not receive custody or choose an arbitrary payout; the cryptographic transcript binds one outcome path while timeout recovery remains indepen…

Text equivalent: Starting from Two parties lock 12 illustrative contract units. Below $50,000 pays A 9 and B 3; $50,000 through $69,999 pays 6 each; $70,000 and above pays A 3 and B 9. Refund height is 300. The mechanism begins when Before the event, the oracle publishes public nonce commitments describing how it will attest possible outcomes. The resulting lesson is The oracle reports data but does not receive custody or choose an arbitrary payout; the cryptographic transcript binds one outcome path while timeout recovery remains independently prebuilt.

2. Mechanism pathSelect a stage to inspect its job

STAGE 1 OF 4

The oracle commits to future attestations

Before the event, the oracle publishes public nonce commitments describing how it will attest possible outcomes.

Complete path: 1. The oracle commits to future attestations: Before the event, the oracle publishes public nonce commitments describing how it will attest possible outcomes. 2. The parties prebuild payouts: The counterparties construct CETs for the outcome ranges. For each CET they exchange adaptor signatures tied to the oracle's announced nonce commitment, so the later matching attestation can complete that payout without giving the oracle custody. 3. The oracle announces the outcome: The oracle signs the observed result. That attestation reveals the cryptographic value needed to complete the matching adaptor signature. 4. Either party can settle: The winning transaction becomes fully signable and can be broadcast. A refund path handles the oracle failing to attest after a timeout.

3. Rule and failure boundaryWhat accepts the result and where it can stop

ACCEPTED PATH

Settlement requires exactly one conserving payout row plus an event-, outcome-, oracle-key-, nonce-, adaptor-, and CET-bound transcript; the separately signed refund becomes eligible only at the stated refund height.

CHANGED CONDITION

Overlapping ranges, nonconserving payouts, a substituted event, outcome, oracle key, nonce, message, adaptor value, or signature reject CET completion. Without a valid attestation before the stated refund height, the contract stays locked until refund eligibi…

Important distinction: A DLC puts the full financial contract into Bitcoin Script. Most outcome logic and negotiation stay off chain. Bitcoin enforces signatures, timelocks, and the resulting settlement transaction.

Text equivalent: The accepted path is enforced by Settlement requires exactly one conserving payout row plus an event-, outcome-, oracle-key-, nonce-, adaptor-, and CET-bound transcript; the separately signed refund becomes eligible only at the stated refund height. If the required condition changes, Overlapping ranges, nonconserving payouts, a substituted event, outcome, oracle key, nonce, message, adaptor value, or signature reject CET completion. Without a valid attestation before the stated refund height, the contract stays locked until refund eligibility.

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Learn the idea

A Discreet Log Contract, or DLC, lets parties make a Bitcoin contract whose payout depends on a future fact, such as a price, while keeping the oracle from controlling the money and keeping most contract detail off chain. A Contract Execution Transaction, or CET, is a prebuilt outcome payout. Adaptor signatures and an oracle's elliptic-curve nonce announcement bind an attestation to completion of the matching CET. BIP340 is Bitcoin's exact Schnorr signature specification. The in-app workbench executes a bounded secp256k1 adaptor equation: it binds the oracle key, event, outcome, announced nonce, attestation scalar, payout-specific CET digest, party key, encrypted scalar, completed signature, funding amount, and signed refund digest. It also applies the independent refund height. This is a deterministic teaching profile, not a wire-compatible implementation of a named production DLC library.

GUIDED EXPLANATION1/4 ideas inspected

The oracle commits to future attestations

Before the event, the oracle publishes public nonce commitments describing how it will attest possible outcomes.

The worked example follows the explanation

Inspect every idea above to open it.

Important distinction“A DLC puts the full financial contract into Bitcoin Script.”

Most outcome logic and negotiation stay off chain. Bitcoin enforces signatures, timelocks, and the resulting settlement transaction.

FINISH LEARNING FIRST

The questions unlock after every required learning activity

Inspect every guided idea, open the worked example, rebuild its mechanism, and complete the deterministic lesson tool. Your progress is saved automatically.