D
D
DLC.Link Docs
Search…
⌃K

With Broker and Proof of Collateral Token

This token is a work in progress, and more information is coming soon.
DLC.Link is designing an ERC-721 (NFT) or ERC-3525 (Semi-fungible token) compatible token (and after that on other chains as well) which can simply represent the Bitcoin locked in the DLC escrow. This type of token is often referred to as a Proof of Reserve or Proof of Collateral token.
While this Bitcoin Proof of Collateral token does represent the Bitcoin value, it is different from a wrapped-BTC in one very important way. This PoC token doesn't itself hold value. It simply references and identifies that Bitcoin is held elsewhere, and can potentially be leveraged by an official Bridge.
As a DLC needs to be opened between 2 Bitcoin wallet holders, only those two participants can ever actually access the Bitcoin funds. The PoC token simply makes programming against that collateral easier. This is especially true when wanting to use the collateral on a defi lending platform e.g. Curve or AAVE.
So in this way, the token is much safer than a traditional Wrapped Bitcoin.
As the PoC token is minted when locking Bitcoin in a DLC, it is likewise burned in order to free the Bitcoin from the DLC. This is done via the same Bridge that originally minted it. In order for the token holder prior to burning to get the value of the Bitcoin, they must have a previous existing relationship with the Bridge.

Setup Loan Flow with Proof of Collateral Token

Below is a diagram showing how a PoC token is minted by a Broker or perhaps by the DLC.Link service itself, when a user locks their Bitcoin into a DLC. Once minted, the PoC token represents a guarantee that funds exist and can't be moved. The PoC token is then sent to a defi platform to be used as collateral.
When the borrower wants to access their Bitcoin again, they simply repay the funds, get their PoC token back, and burn it, which unlocks the DLC and their collateral is returned.
  1. 1.
    Borrowing user browses to the Defi app and sets up the details of the desired loan.
  2. 2.
    They are directed to a bridging application, which may be part of the Defi app, directly part of DLC.Link, or a 3rd party. Here they set up the details of the DLC and identify their Bitcoin collateral.
  3. 3.
    The DLC is set up via the DLC.Link smart contracts and Bitcoin Oracles (TM).
  4. 4.
    The user accepts the details of the DLC in their Bitcoin wallet.
  5. 5.
    The Bitcoin is locked into the DLC.
  6. 6.
    The bridging application from step 2 mints the Proof of Collateral tokens representing the collateral.
  7. 7.
    The user is directed back to the defi lending app where they can use the PoC tokens as collateral.
  8. 8.
    The user sends the PoC tokens to the defi application's smart contract to borrow stable coin.
  9. 9.
    The user's stablecoin loan is issued to their wallet.

Liquidation Flow with Proof of Reserve Token

In a liquidation case, however, the Broker or another liquidator buys the PoC token from the defi platform. The PoC token can be held or traded as desired.
When the token holder wants to redeem the Bitcoin collateral, they need an account with the Bridge that originally minted the token. When they burn the token, and the funds are send to them by the Bridge.
  1. 1.
    3rd party liquidator(s) send payment to the defi protocol to cover the loan.
  2. 2.
    The Proof of Collateral tokens are sent from the defi protocol to the liquidator(s).
  3. 3.
    The PoC tokens are burned, which is picked up by the DLC.Link smart contract.
  4. 4.
    The DLC is closed with the outcome associated with the liquidation event. Specifically, what % of collateral should go to the liquidator(s), and what % should go to the original borrower.
  5. 5.
    The DLC is closed, releasing the BTC to the Broker and the borrower.
  6. 6.
    The Broker pays out the liquidator(s) depending on their pre-negotiated terms.