Liquidium enables secure peer-to-peer lending using Bitcoin-based Discreet Log Contracts (DLC), multi-signature escrows, and Partially Signed Bitcoin Transactions (PSBT). This document breaks down how our unique system ensures trust, security, and transparency for both borrowers and lenders on the Bitcoin blockchain.
1. The 2/3 Multisig Escrow System
At the core of Liquidium’s security is a 2-of-3 multisignature (multisig) escrow, which is executed entirely on the Bitcoin blockchain. This system ensures that collateral (such as Ordinals) remains secure during the loan term and that no single party can unilaterally move assets. Here’s how it works:
Three Parties Involved:
Borrower: Provides collateral (e.g., Ordinals) for the loan.
Lender: Provides Bitcoin to the borrower.
Liquidium Oracle (via DLC): Attests to the outcome of the loan and acts as the third signer.
Multisig Mechanics: Two of the three involved parties must sign off to unlock the collateral from escrow. This guarantees that no single party can control the movement of assets.
Atomic Transactions: The loan transaction is atomic. This means that before signing, all parties can verify the exact terms of the transaction. Borrowers and lenders can check which Ordinal is moving to escrow and confirm the exact amount of Bitcoin being transferred in the loan. In this context, "atomic" means that the transaction is either fully completed or not at all—there’s no room for partial execution or fraud.
2. Timelock on Lender’s Signature
Another key layer of security is the timelock, which is also implemented fully on the Bitcoin blockchain. This ensures that the lender cannot access the collateral prematurely.
How the Timelock Works: The lender’s address is time-locked for the entire loan duration. Until the loan period expires, the lender cannot sign any transactions or access the collateral.
Why It Matters: This guarantees that the borrower’s collateral (whether Ordinals or other assets) is safe for the agreed loan period, giving the borrower peace of mind that the lender cannot act before the loan term ends.
3. Discreet Log Contracts (DLCs)
Liquidium leverages Discreet Log Contracts (DLCs) to determine the outcome of the loan. The DLC functions as a third-party oracle that attests to whether the borrower has repaid the loan or defaulted.
If the Borrower Repays: The DLC provides a signature that unlocks the collateral, returning it to the borrower.
If the Borrower Defaults: The DLC signs off with the lender, enabling the lender to claim the collateral.
This mechanism ensures that loans are executed fairly, based on the conditions agreed upon at the start of the loan. The use of DLCs adds another layer of security and neutrality to the process.
4. Key Benefits and Security Model
The combination of multisig, timelocks, and DLCs offers a highly secure and transparent framework for peer-to-peer lending on Liquidium. The following are key benefits:
On-Chain Security: Both the 2/3 multisig and timelocks are fully implemented on the Bitcoin blockchain, ensuring transparency and security without relying on off-chain systems.
No Single-Party Control: No single party (borrower, lender, or oracle) can move the collateral without the consent of at least one other party. This protects the interests of both borrowers and lenders.
Atomic Transactions: Every transaction is atomic, meaning it is either fully executed or not at all. All parties can verify the transaction details before committing.
Collateral Protection: During the loan period, the borrower’s collateral is completely protected by the multisig system and the timelock, preventing any unauthorized access.
Fair Loan Resolution with DLC: The use of DLC ensures that the loan outcome is fairly determined, and the appropriate parties (borrower or lender) receive the collateral based on repayment status.
5. Trade-offs in Trust and Centralization
While Liquidium’s model offers strong security guarantees, there are trade-offs in terms of trust and permission. Here’s how we address these:
Multisig with a Central Oracle: The Liquidium Oracle provides one of the three required signatures, which introduces a slight degree of centralization. However, the oracle cannot act alone—two signatures are needed to unlock the escrow.
Trust and Permission: Although Liquidium’s model requires a certain level of trust in the parties involved, this is balanced by the transparency of the blockchain and the use of cryptographic systems like multisig and DLC.
6. Paths Forward for Oracle Decentralization
To further enhance trust and decentralization, Liquidium is exploring several potential paths for decentralizing the oracle function. These approaches are designed to reduce reliance on a central entity while maintaining the security and efficiency of the system:
Multiple Oracle Participants: One path forward is introducing multiple independent entities to act as oracles. In this scenario, several parties would be responsible for attesting to loan outcomes, with a majority or consensus required to unlock the collateral. This distributes trust and reduces the impact of any single point of failure.
Decentralized Oracle Networks: Another approach involves using decentralized oracle networks, where multiple nodes operate in concert to verify loan outcomes. This would further decentralize the decision-making process and increase resilience across the system.
Leveraging Smart Contract Platforms: Liquidium is also considering the use of decentralized smart contract platforms, such as ICP, to host the oracle function. This would allow the oracle to be distributed across multiple nodes, further minimizing centralization and increasing scalability.
Community-Run Oracles: Finally, Liquidium is exploring the potential for community-operated oracles. In this model, trusted community members or third-party validators would run the oracle service, introducing an additional layer of decentralization and community governance.
7. Security Audits
Liquidium’s core technology—covering Bitcoin logic, DLC, PSBT, and multisig—has undergone a comprehensive audit by Scalebit. These technologies are essential to the functionality of Ordinals, Runes, and BRC-20 lending and borrowing on Liquidium.
Who audited? Scalebit, a reputable blockchain security firm.
What was audited? All core Bitcoin logic, including DLC, PSBT, and multisig.
Where is the technology used? These technologies are fundamental to the lending and borrowing ecosystem for Ordinals, Runes, and BRC-20 tokens.
What was found? No significant security risks were found, and all other identified issues were promptly resolved.
When was it completed? The audit was completed on August 20th.