One of the world’s quietest but best-funded bitcoin companies is gearing up to participate in the decentralized finance (DeFi) bull run 2020.
In July, the conglomerate DG Lab, which like the Ethereum powerhouse ConsenSys includes both an investment arm and an adjacent software company, opened its proposal to trade self-sovereign derivatives on the Bitcoin blockchain, using the Lightning Network.
These contracts turn bitcoin, the asset itself, into programmable currency capable of a wider variety of functions.
This offers a stark contrast to DeFi’s typical approach so far, which relies on ‘wrapped’ representations of bitcoin or trading platforms. Silicon Valley start-up cLabs recently acquired DeFi Summa, which led the bitcoin-on-Ethereum approach. It now appears that DG Lab, founded in 2015, is the main incumbent exploring DeFi opportunities for Bitcoin.
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“I worked on a proposal to integrate the DLC [Discreet Log Contracts] and channels to the Lightning Network, ”said DG Lab researcher Ichiro Kuwahara of his recent work. “We can establish a lot of contracts without broadcasting transactions on the blockchain.”
This software uses the Lightning Network to execute business logic without clogging the base layer blockchain. The hottest trend among Bitcoin veterans these days is to imagine DeFi functionality applied to bitcoin currency through such layers. There are many opinions on how to approach this opportunity, from DLC to soft forks.
Not everyone agrees on how to use Lightning for smart contracts.
Bitcoin veteran Jeremy Rubin, who launched his start-up Judica this summer, believes Blockstream’s Liquid Network, which companies like Crypto Garage are using to experiment with such smart contracts, is complicating construction.
“I think we can do it a lot simpler. … It is resolvable in chain but can be done in [Lightning] channels as well, ”Rubin said in an interview, explaining how his proposed Bitcoin soft fork could optimize the base layer for smart contracts. “I can build this contract, which is a derivative, without you being online. I can make a valid contract and then send it to you by email. “
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These days, both ends of a Lightning transaction need to participate at around the same time for payment to be made. (Or, at least, the two have to set everything up in advance.) Rubin argues that there is a way to make sure that one party can execute a consensual transaction. Public keys allow the other party to see proof of everything related to the agreement every time they log in.
“It’s this notion of flow and conditionality that doesn’t currently exist in Bitcoin,” Rubin said. ” [These 2020 DeFi projects] aim to help define journeys … a sequence of steps that can occur depending on choices along the way. “
There are enough engineers working on DeFi options for Bitcoin that one of them can technically work, even if socially it is not spreading. Only time will tell which ones will find their place in the commodity market and how that may or may not drive the adoption of crypto.
Taking a step back, the DeFi bulls of the DG Lab Fund raised more than $ 93 million in 2019 and, according to the company’s blog, are raising a second fund in 2020.
The fund invested in DG Lab, the separate eponymous start-up, which simultaneously attracted investors from Japanese companies, including e-commerce giant Kakaku.com and telecommunications provider KDDI. Meanwhile, the DG Lab Fund itself has invested in River Financial, Arwen, Blockstream and Curv, to name a few, in addition to startups in adjacent industries such as AI and security.
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“We have several startups that work with DLC. For example, Suredbits is one of the key players in this area and we are working closely with them ”, said Shunichi Kimuro, Senior Director of DG Lab Fund. “We wanted to show what is possible using the Bitcoin protocol using our peer-to-peer [P2P] derivatives. “
Another startup called Crypto Garage, which DG Fund has not invested in directly, is using Blockstream’s Liquid technology to explore this type of smart contract software.
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“You define the results of your contracts and create a transaction for each of the results. And it can only be unlocked with one of the final transactions or with a mutual agreement between the contract participants, ”Crypto Garage engineer Thibaut Le Guilly said in an interview.
Rubin pointed out that while he disagreed with Le Guilly on some aspects, these Bitcoin projects have much more in common with each other than with the Ethereum DeFi projects.
“There is a very big gap between DeFi, like Ethereum is trying to do, and P2P funding,” Rubin said. “Uniswap is really great. But they symbolize their cash reserves. … We [Bitcoiners] talk about finding a way for people to work directly with each other. “
Bitcoin DeFi projects don’t use Bitcoin representatives, they want to allow traders to perform tasks directly with Bitcoin.
“There are about 20 people in the Bitcoin community who are working on tools, applications and specifications for [Discreet Log Contracts], including at SuredBits, ”Le Guilly said in an interview. ” [Traders] do not have to involve an exchange.
It seems Ethereum DeFi proponents are offering a different take on decentralization than their node-obsessed Bitcoiner brethren. Joe Lallouz, CEO of Bison Trails, said that starting up its infrastructure can easily move accounts across borders, in part thanks to a distributed team. From his perspective, this is a slightly decentralized step away from Silicon Valley standards.
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“If Amazon says 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 should say that the blockchain network is something that we do not support [to censor our customers] on the Internet. “
While Ethereum DeFi experiments attract quick flashes of capital, losing considerable sums as advocates iterate, Bitcoin DeFi experiments appear relatively small. Still, veterans know that the Bitcoin development scene in Tokyo should not be underestimated, which is home to the creators of self-sovereignty experiences including BTCPay and DG Lab. This time may just be the calm before a perfect storm.
“Once there are enough people to create a real market, we could offer services or tools that we can monetize,” said Le Guilly of Crypto Garage. “At this point, our goal is to raise awareness of what can be done with Bitcoin.”