Side Protocol: Decentralized Bitcoin-Powered Finance and Smart Contracts

Side Finance, a sub-protocol of Side Protocol, is a decentralized financial system designed to optimize the capital efficiency of Bitcoin (BTC) by providing a liquidity pool-based lending solution. It requires no third-party custody of the BTC collateral, ensuring full control remains with the user.

Key principles of Side Finance include:

• Non-Custodial Control: Borrowers retain full control over their BTC collateral unless liquidation occurs. All collateral is secured using 2-of-2 multi-signature addresses, requiring borrower consent for transactions.
• Trust-Minimized Ecosystem: Side Finance reduces risk by ensuring that the economic risks of borrowing or lending are handled within the alt-chain ecosystem, avoiding dependency on trusted third parties.

• Threshold Adapter Signatures: These signatures enable conditional transactions by revealing a secret value only when paired with the corresponding signature. Adapter signatures provide more flexible conditional structures without increasing on-chain data requirements.
• Discreet Log Contracts (DLCs): DLCs are a core component of Side Finance, offering trustless, oracle-based conditional payments without requiring a third-party custodian. Using a combination of cryptographic methods, including multi-signatures and Schnorr signatures, DLCs ensure secure and non-custodial management of funds.

Side Finance operates as a non-custodial solution, ensuring that third parties never hold BTC collateral throughout the loan period. The primary trust assumption is applied during the collateral liquidation process and repayment settlement.

The Collateral Vault uses 2-of-2 multi-signatures and HTLCs to secure BTC. Key processes include:

• Collateral Liquidation: Triggered by default or loan depreciation, utilizing Schnorr adapter signatures.
• Loan Repayment: Secured by a borrower-generated signature.
• Emergency Reclaim: If Side Finance stops responding, a final hash timelock ensures the borrower can reclaim the collateral.

The Lending Contract on the Side Chain governs the management of loan assets, offering liquidity providers flexible entry and exit options while maintaining non-custodial control over funds.

Oracles are critical to ensuring accurate BTC price data for liquidations. Side Finance employs decentralized oracles run by 21 validators who sign periodic price attestations. If any oracle behaves maliciously or provides incorrect price data, their stake is slashed, and their reputation damaged across multiple chains.

• Oracle Slashing: Any significant deviation in the proposed price from approved upstream sources can lead to penalties for the oracle operator.
• Upstream Price Source Security: Oracle operators monitor and validate data from reliable sources, and if discrepancies arise, they temporarily halt price attestations to resolve issues.

The Distributed Collateral Agent (DCA) manages liquidated assets and enforces the terms of loan agreements. The DCA is separate from both the Lending Contract and the Oracle, with its operations limited to holding and auctioning liquidated assets. Misconduct by DCA operators results in penalties, including possible removal from the role.

Side Chain is a high-performance scaling solution that enhances Bitcoin’s scalability and reduces transaction fees. It is fully compatible with Bitcoin addresses and wallets, allowing users to interact with the chain using their existing Bitcoin infrastructure.

Key features include:

• Bitcoin Address Compatibility: Users can interact with Side Chain using existing Bitcoin addresses (Taproot & Native SegWit).
• Native Gas Token: Unlike other chains, Side Chain uses BTC as its native gas token.
• Cross-Chain Interoperability: Side Chain supports interoperability with major ecosystems like Ethereum, Solana, and Cosmos, enabling seamless cross-chain transactions.

Side Bridge enhances Bitcoin’s interoperability with other blockchains, facilitating the transfer of BTC and Bitcoin-based assets. The bridge uses a threshold signature scheme operated by 21 reputable validators, ensuring reliable performance as long as at least 15 validators remain active.

• Trust-Tolerant Solution: While Side Bridge offers more transparency than typical Bitcoin bridges, it remains a trust-tolerant solution. Non-custodial alternatives, like Side Finance, will soon be available for users seeking trust-minimized options.

Side Protocol is a decentralized solution designed to unlock the full potential of Bitcoin, enabling secure, non-custodial finance, smart contracts, and cross-chain interoperability. Through innovative technologies like DLCs, adapter signatures, and a Bitcoin-compatible appchain, Side Protocol is advancing Bitcoin’s role in decentralized finance.

To explore Side Protocol’s testnet, visit: Side Protocol Testnet.