Blockstream Sends First ‘Trust-Minimized’ P2P Bitcoin Derivative Transaction Settled by An Oracle
Blockstream has recently announced that it successfully processed a Bitcoin forward contract transaction with Crypto Garage. In order to make that possible, they based this transaction on Crypto Garage’s peer-to-peer asset derivative protocol. The information was released by Blockstream on April 19.
Forward Contract Transactions On Top Of Bitcoin
In a recent blog post, Blockstream informed that they have performed the first trust-minimized forward contract transaction. Using Crypto Garage’s platform, an oracle was able to settle the transactions by referencing the spot price from the ICE Cryptocurrency Data Feed. This shows the potential for derivatives to be exchanges and settled without the need for a third party or counterparty risk.
As the blog post explains, a forward contract is a derivative that represents a bilateral agreement to buy or sell a specific asset at a “forward rate” and at a predetermined date in the future. This is in order to strategically hedge the asset against price changes, specifically in Bitcoin, where there are several moments in which the digital asset behaves in a very volatile way.
About forward contracts, they explained:
“Forward contracts are typically unsecured by any collateral and rely on mutual trust between the two parties engaged in the contract. The absence of collateral means that each party is at risk of the other failing to deliver upon completion of the contract.”
With this trust-minimized derivative contract, Bitcoin collateral can be posted by both parties. It also can be locked in a 2-of-2 multi-signature (multisig) smart contract until the date of maturity. With the implementation of Crypto Garage, it is possible to incentivize both parties in order for them to act truthfully with their signature.
Blockstream believes that the partial-collateralization of these futures contracts is a double-edged sword that could end up with very large losses for the parties involved. Although these are called “trust-minimized” bitcoin forwards, the community explained that they are actually based on the use of a “trusted price feed.”