Peer-to-Peer Bitcoin Derivatives: DLCs, Stable Channels, and the Cost of Trustlessness

Abstract

Bitcoin derivatives trading regularly exceeds $200 billion daily, yet participants must trust centralized exchanges-the same exchanges that have repeatedly failed, from BitMEX's regulatory crisis in 2020 to FTX's collapse in 2022. This paper provides the first comparative analysis of three approaches that enable long/short Bitcoin exposure without exchange custody: Discreet Log Contracts (DLCs), Stable Channels, and Stablesats (included as a custodial comparison). Each mechanism allows two parties to take opposite sides of BTC/USD price movements-one hedging (short), one speculating (leveraged long)-settled entirely in Bitcoin. We analyze the mechanism design, trust assumptions, and trade-offs of each approach. These are not stablecoins; they are bilateral derivatives contracts. They sacrifice liquidity and convenience-the cost of trustlessness-serving participants unwilling to accept exchange counterparty risk.