[bisq-network/bisq] Investigations for a new trade protocol (#5430)

[Philipp Hoenisch]

Hi all, 

Disclaimer: I'm working at COMIT (https://github.com/comit-network/).

I find it interesting that you propose Liquid as a possible infrastructure to power Bisq's trade protocol. And I'm generally a fan of Liquid, it's confidential transaction format and it's low transaction fees and multi-currency transactions. 

We started looking into Liquid quite some time ago and built a simple demo for a Dex on Liquid powered by a wallet as a browser extension [0]. But that's not not what I came here for :D

I want to raise an additional point why I think Liquid could be the right choice. And that is transaction covenants. 
In a nutshell, transaction covenants is a (Bitcoin) script that restricts the form of the transaction which spends a certain UTXO. One could for example restrict the amounts, the asset type and the target address using transaction covenants. Read more here: [1]

While unfortunately not yet possible on Bitcoin, on Liquid we can build pretty powerful covenant scripts using the opcodes `OP_CHECKSIGFROMSTACK` and `OP_CAT`. 
One thing we built lately was a 2-party lending protocol [2,3] using transaction covenants on Liquid. 

A borrower can take up a Bitcoin collateralized loan and receive a stable coin such as L-USDT. While the setup of the loan transaction is collaborative, the payback or liquidation is fully unilateral. The script itself ensures that the loan terms are adhered to. 

I'm aware that lending/borrowing is not the core focus of Bisq, but I'm convinced that with transaction covenants we can build more powerful things. 

One topic which was mentioned above was AMM. We started looking into AMM pools just recently and we think we can encode the logic of the pool and enforce it using a script. 
The ideas on this are very early stage and not written down yet but you can think of a (simplified) Balancer/Uniswap just on Liquid. 
We will be looking into this more in the following weeks. 

Ideally we can build all of this on top of Bitcoin, so I also want to link to [4,5] which are efforts to get transaction covenants into Bitcoin itself. 

Cheers

[0] https://github.com/comit-network/waves and https://twitter.com/comit_network/status/1374246354931707905?s=20
[1] https://blockstream.com/2016/11/02/en-covenants-in-elements-alpha/
[2] https://comit.network/blog/2021/03/31/borrowing-without-a-middleman/
[3] https://github.com/comit-network/waves/pull/153
[4] https://medium.com/blockstream/cat-and-schnorr-tricks-i-faf1b59bd298
[5] https://utxos.org/

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