Bet Protocol Technical Overview

The protocol takes two messages and one on-chain transaction.

The first message, the "proposal", contains a public key (P1) which the second message, the "offer", will be encrypted under. The offer contains a public key (P2) and a ciphertext. The offer is encrypted by deriving a key from the Diffie-Hellman key between the two keys.

The two public keys are also used to construct the bet output which holds the coins until the outcome has been decided by the oracle. The script locking the coins is a 1-of-2 with keys like:

1-of-2(P1 + O1, P2 + O2)

Where P1 and O1 represent the public key of the proposer and the outcome they are betting on respectively (P2 and O2 represent the same for the offerer). If the oracle releases O1 then the proposer will get the coins otherwise if the oracle releases O2 the offerer gets them. The Diffie-Hellman keys is also used to produce secret randomness (R1 and R2) which both parties use to randomize the output script. So the output script is really something like:

1-of-2(P1 + O1 + R1, P2 + O2 + R2)

This randomization means the output keys can't bet associated with the proposal and offer keys (P1 and P2). The order of the keys in the 1-of-2 is also randomized.

When the winner learns the secret for O1 or O2 from the oracle they can claim the coins because they can construct the secret key for P1 + O1 + R1 or P2 + O2 + R2. Note there is no real hurry for them to do so except that the coins can be recovered from seed words once they have been properly claimed.