Bitcoin LC Workflow with Nodejs 🚀

Create a Letter of Credit workflow on Bitcoin

Introduction

A Letter of Credit (LC) is a well-established financial instrument in international trade, ensuring that a seller receives payment for goods shipped. In the age of blockchain and cryptocurrencies, there’s potential to revolutionize the LC process using Bitcoin.

In simple words: An LC is like a promise note issued by a bank, ensuring that a seller gets paid once certain conditions, like shipping the goods, are met. Think of it as a safety net in international trade.

Traditional LC Process

In the conventional setup, the LC process involves three key players:

1. Buyer: Requests the LC.
2. Bank (Issuer): Guarantees payment to the seller once conditions are fulfilled.
3. Seller: Receives the LC and ships the goods.

The bank is the middleman, ensuring the seller is paid under the agreed conditions.

Implementing the LC Workflow in Bitcoin

Bitcoin, with its scripting language, offers a new way to handle these transactions. However, Bitcoin’s scripting is less versatile than Ethereum’s Solidity. For simplicity, we’ll use multi-signature addresses in our example.

The Process:

1. Initialization: Buyer, seller, and bank each have a Bitcoin address.
2. Multi-Signature Address: Created to need signatures from the buyer and the bank to release funds.
3. Locking Funds: Buyer sends the purchase amount to this address.
4. Release of Funds: Upon proof of shipment, the bank and buyer release funds to the seller.

The Code: A Breakdown

1. Initialization and Generating Keys

const bitcore = require("bitcore-lib");
const axios = require("axios");

const network = bitcore.Networks.testnet;

const buyerKey = new bitcore.PrivateKey(network);
const sellerKey = new bitcore.PrivateKey(network);
const bankKey = new bitcore.PrivateKey(network);

const multiSigAddress = new bitcore.Address([buyerKey.publicKey, bankKey.publicKey], 2, network);

We initialize our libraries and then generate private keys for the buyer, seller, and bank. Using the buyer and bank’s public keys, we create a 2-of-2 multisig address.

2. Fetching UTXOs for Multisig Address

const { data: utxos } = await axios.get(`https://blockstream.info/testnet/api/address/${multiSigAddress}/utxo`);

This fetches all unspent transaction outputs (UTXOs) for our multisig address, representing the funds locked in by the buyer.

3. Creating the LC Transaction

Once the seller has met the conditions, the funds can be released:

const tx = new bitcore.Transaction()
    .from(utxos)
    .to(sellerKey.toAddress(network), amount)
    .change(multiSigAddress)
    .sign([buyerKey, bankKey]);

Both the buyer and bank sign the transaction to release funds to the seller.

4. Broadcasting the Transaction

const { data: result } = await axios.post("https://api.blockcypher.com/v1/btc/test3/txs/push", {
    tx: tx.serialize(),
});

console.log("Transaction ID:", result.tx.hash);

Finally, the transaction is broadcasted to the Bitcoin testnet using the BlockCypher API.

After completion, the code looks like this:

// Initialization and Key Generation
const bitcore = require("bitcore-lib");
const axios = require("axios");
const network = bitcore.Networks.testnet;

// Generating private keys for all parties
const buyerKey = new bitcore.PrivateKey(network);
const sellerKey = new bitcore.PrivateKey(network);
const bankKey = new bitcore.PrivateKey(network);

// Creating a 2-of-2 multisig address using the buyer and bank’s public keys
const multiSigAddress = new bitcore.Address([buyerKey.publicKey, bankKey.publicKey], 2, network);

// Fetching Unspent Transaction Outputs (UTXOs) for the Multisig Address
const { data: utxos } = await axios.get(`https://blockstream.info/testnet/api/address/${multiSigAddress}/utxo`);

// Creating the LC Transaction when conditions are met
const tx = new bitcore.Transaction()
    .from(utxos)
    .to(sellerKey.toAddress(network), amount)
    .change(multiSigAddress)
    .sign([buyerKey, bankKey]);

// Broadcasting the Transaction
const { data: result } = await axios.post("https://api.blockcypher.com/v1/btc/test3/txs/push", {
    tx: tx.serialize(),
});
console.log("Transaction ID:", result.tx.hash);

While this process doesn’t capture all nuances of a traditional LC (like document verification), it serves as a rudimentary model of how Bitcoin can be used in trade finance scenarios.

Real-World Applications and Limitations

Applications: This Bitcoin-based LC could streamline international trade by reducing dependency on traditional banking systems, speeding up transactions, and potentially lowering costs.

Limitations: The current limitation of Bitcoin’s scripting language compared to more versatile platforms like Ethereum might restrict more complex LC conditions. Additionally, the wider acceptance of cryptocurrency in international trade is still evolving.

Bitcoin Scripting Limitations

Bitcoin’s scripting language, while powerful, is less flexible than Ethereum’s Solidity. This means certain complex contractual agreements in LCs might be challenging to implement on the Bitcoin blockchain. Future developments or integration with more advanced blockchain platforms could address this.

Security Considerations

Security is paramount in financial transactions. Utilizing Bitcoin for LCs raises questions about transaction security, private key management, and the robustness of the Bitcoin network against fraud and hacking. It’s crucial to have strong security protocols in place.

Conclusion

While this Bitcoin-based LC process is a rudimentary model, it opens doors to innovative approaches in trade finance. Addressing its limitations and capitalizing on its potential, could be a significant step forward in the intersection of finance and technology.