There are many ways to improve the way people currently use Bitcoin and other cryptocurrencies, Introducing a layer of confidentiality is one option to explore. Discreet Log Contracts can change the entire narrative, assuming they are ever implemented in full.
The Benefits of Discreet Log Contracts
It is a well-known fact that Bitcoin is very transparent. That is, under most circumstances, not a real issue. Despite this aspect, many people seem to believe Bitcoin is anonymous, even though the world’s leading cryptocurrency is anything but that. There’s also a downside to this transparency, especially when creating a redistribution of funds. The entire world will be aware of what is happening, which is not always ideal.
Solving this aspect will not be all that easy. There are multiple options to explore, with Discreet Log Contracts being floated for many years now. It is a different form of monetary “contract”, allowing users to conduct a transfer without revealing specific transaction conditions. On the blockchain, such transactions will resemble regular multi signature outputs. Introducing this layer of discretion will not be an unnecessary luxury either.
Similar to how smart contracts work, a Discreet Log Contract will rely on external entities. In this case, those are referred to as “oracles” to publish a signed message in the future before the original contract expires. Based on this oracle signature, the funds in the contract will be divided and distributed accordingly. Oracles are not privy to the contracts or the data, as they are solely there to publish their signed message.
What are the use Cases?
Average Bitcoin users may never have a need for Discreet Log Contracts. Not because the functionality can’t be beneficial, but because it isn’t relevant to them at the current time. For users exploring Bitcoin-settled forward contracts, for example, things are a bit different. It can create a completely different way of buying and selling Bitcoin at certain times and under specific conditions. Those actively hedging against volatility may want to take particular note of this new option.
Discreet Log Contracts can also usher in a new era of Bitcoin e-commerce. Merchants prefer not to display prices in BTC due to their purchases being made in fiat. Combined with cryptocurrency volatility concerns, something will need to change sooner or later. These new contracts can offer a solution to preserve some of the fiat value in this equation. An interesting concept, assuming it can be made accessible.
Integration Discreet Log Contracts is Complex
Despite the innovative options provided by Discreet Log Contracts, integrating them in the real world will not be easy. The first order of business is finding oracles, which may prove a lot more difficult than initially assumed. Considering how most people will prefer decentralized oracles, there need to be many different sources of data at all times. Even then, the majority of oracles need to agree on a price before submitting it to the rest of the network.
Secondly, both parties in a Discreet Log Contract need to contribute the same amount of coins. That may not be a challenge for smaller payments, but for big transactions, it can be quite a hindrance. Assuming both parties succeed in doing so, there are still different types of execution transactions to keep in mind. Coding all of these options into the Bitcoin protocol – or a layer-two solution built on top of Bitcoin – will take months, if not years to complete properly.
Additionally, there is the inherent Bitcoin price volatility to take into account. If a major price difference were to occur, Discreet Log Contracts may run into execution problems. Furthermore, there is the “trust factor” regarding the oracles. It will always be a problem, as trust needs to be earned first and foremost.
Finally, there needs to be some sort of “matching” to complete transactions automatically. Using Discreet Log Contracts on a large scale will require automated matching of sorts, which may prove rather difficult to implement right away.