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What Are Bitcoin Smart Contracts: A Beginner’s Guide

Smart contracts are self-executing agreements powered by code… Learn how to make them work for you with Swan!

Mickey Koss
Drew
Mickey Koss and Drew
Apr 19, 2024April 19, 202414 min read14 minutes read

Bitcoin. You’ve heard of it as “digital gold” or “magic internet money,” enabling payments without banks. But did you know Bitcoin can do even more than simple peer-to-peer transactions? 

In this beginner’s guide, we’ll decode the buzz around Bitcoin smart contracts and show you how they work. By the end, you’ll see Bitcoin as more than just a store of value but a platform for the next generation of digital financial products. Strap in!


  • Understanding Bitcoin Smart Contacts

  • The Evolution of Bitcoin Smart Contracts

  • How Bitcoin Smart Contracts

  • Ongoing Developments and Future Potential for Bitcoin Smart Contracts

  • Real-World Applications of Bitcoin Smart Contracts

  • Getting Started with Bitcoin Smart Contracts

  • Bitcoin Smart Contracts FAQ 

  • Wrapping Up the Bitcoin Smart Contract Story


Understanding Bitcoin Smart Contracts

Simply put, a smart contract is an “if/then” agreement written in computer code rather than legal jargon. For example, if X event happens, then execute Y action. The key difference between traditional and smart contracts is enforcement — smart contracts auto-execute once conditions are met, and no middlemen are required!

How Smart Contracts Work

Blockgeeks

We can understand smart contracts through the vending machine analogy. A vending machine takes your cash, connects it to a desired snack choice, and dispenses it once you select an item. The entire agreement—cash for chips—is handled automatically based on written code rather than a human. Now, translate that to the digital world, and you’ve got smart contract basics down!

The core benefit of smart contracts is that there is no longer a need for costly intermediaries or blind trust between counterparties. Code execution also brings speed, efficiency, and transparency to agreements.

As Bitcoin matures, smart contracts open doors for programmable money applications that were impossible before. Exciting times ahead!


The Evolution of Bitcoin Smart Contracts

Introduction to the concept of smart contracts on the Bitcoin network

The beauty? These digital agreements run on the Bitcoin blockchain, making them as trusty as a Swiss watch — they automatically execute transactions when certain conditions are met, no middlemen needed!

Since its launch in 2009, Bitcoin development has focused on peer-to-peer electronic cash—sending value from A to B without banks or middlemen. Yet even in its early days, enthusiasts saw more possibilities—like enabling complex contracts through code! 

Now, before your eyes glaze over at the mention of “contracts” (because let’s face it, that word conjures up images of stuffy lawyers and endless stacks of paperwork), let me assure you: We’re not talking about your average legal document here. 

Bitcoin smart contracts are like your tech-savvy friend who always knows how to handle money matters without getting emotionally involved. They’re self-executing contracts with the terms of the agreement directly written into lines of code. 

The beauty of Bitcoin smart contracts lies in their simplicity and efficiency. These digital agreements run on the Bitcoin blockchain, functioning like a Swiss watch — they automatically execute transactions when certain conditions are met, eliminating the need for intermediaries.

Several Bitcoin Improvement Proposals (BIPs) have since brought smart contract capability to the protocol.

OP_RETURN (2014) — Allow short messages in transactions  
OP_CHECKLOCKTIMEVERIFY (2015) — Timelock funds until X date  
OP_CHECKSEQUENCEVERIFY (2015) — Timelock funds until X block

These upgrades allow basic smart contract functions in Bitcoin, like escrows, time-bound payments, multi-party agreements, and more. While Bitcoin’s scripting language intentionally limits complexity, developers continue finding creative solutions to build next-gen digital agreements on a secure foundation.


How Bitcoin Smart Contracts Differ from Ethereum

While Bitcoin’s approach to smart contracts emphasizes simplicity, security, and reliability, enabling robust yet relatively basic functions, Ethereum embraces complexity to offer a broad spectrum of functionalities at the expense of potentially increased attack surfaces and scalability issues. 

The choice between the two largely depends on the requirements of the use case at hand. Bitcoin’s limitations are designed to prioritize security and stability over versatility. Smart contracts in Bitcoin are essentially pre-defined conditions encoded into transactions. Executing such conditions results in the transactions being completed.

On the other hand, Ethereum was conceived as a distributed computing platform with a broader ambition. It allows developers to write more complex and conditional contracts, often called decentralized applications (dApps). 

However, this enhanced capability comes with its own set of challenges, notably in the areas of security and scalability. Complex contracts can be more challenging to audit, leading to vulnerabilities.

In contrast, the computational demands of running these contracts have led to congestion and high transaction fees during peak times. The massive amount of data involved also prevents the average user from running their own node, leading to centralization concerns.

Security benefits of Bitcoin’s limited scripting language

Bitcoin’s scripting language is like the cool, minimalist friend who shows up at a potluck with a dish with only three ingredients but somehow steals the show.

The Bitcoin scripting language, known simply as Script, is a stack-based, executed-from-left-to-right set of instructions that makes smart contracts possible. But here’s the kicker—it’s intentionally limited. Why, you ask? Well, because with simplicity comes great security.

  • High Security: Imagine a fortress with fewer doors. Fewer doors mean fewer ways for invaders to sneak in. 

  • Easy to Learn: You don’t need to be a coding Jedi to get the hang of Bitcoin Script. It’s designed to be easy for anyone to pick up. 

  • Stability: Bitcoin’s Script is as stable as your grandmother’s 100-year-old sourdough starter. This reliability ensures that contracts executed today will run the same way years later, providing a solid foundation for financial agreements.


(Actual) Decentralization

In the Bitcoin ecosystem, running a full node is akin to having VIP backstage passes at a rock concert—you get complete autonomy and control, plus a front-row seat to the action.

The beauty of Bitcoin’s streamlined approach means that almost anyone with a standard computer and an internet connection can join the party.


Ongoing Developments and Future Potential for Bitcoin Smart Contracts

Lightning Network Love

The Lightning Network is like Bitcoin’s express lane, and when it comes to smart contracts, it’s ready to take them from a trot to a gallop. The Lightning Network comprises multiple bidirectional payment channels that handle transactions parallel to the main blockchain.

Using a series of smart contracts that “lock” Bitcoin within the Lightning Network avoids issues like double-spending. This means lightning-fast transactions with a side order of reduced fees.

It’s like upgrading from a dial-up connection to fiber-optic internet—game-changing.

Taproot and CTV Change Everything

Though not adopted into Bitcoin’s code, CTV brings a dash of predictability to the table by allowing Bitcoiners to define conditions for how coins can be spent in the future. Paired with additional privacy gained by Taproot, the dynamic duo has the potential to give smart contracts on Bitcoin flexibility and strength.

Advocates also think that CTV may be able to keep transactions leaner, reducing future demand for that precious block space. 

The Almighty Dollar—Err, Satoshi

Combine all these advancements, and what do you get?

A future where your Bitcoin works smarter, not harder, potentially increases your stash’s value and utility. More secure, efficient, and versatile smart contracts mean a more robust Bitcoin ecosystem. And who doesn’t like the sound of that?


Real-World Applications of Bitcoin Smart Contracts

Bitcoin’s smart contract capabilities are actively employed in numerous areas today and have promising potential use cases. Here are a few notable examples:

  • Escrow Services: Bitcoin smart contracts can be programmed to allow for escrow services. For instance, a Bitcoin smart contract can be designed to return the initial escrow deposit to a tenant’s account via a separate transaction only after the lease has expired and all the payments have been made. Such smart contracts can increase trust and security during transactions.

  • Automated Payments: Smart contracts can automate conditional Bitcoin payments without counterparty risk. For example, one could construct a conceptual Bitcoin vending machine dispensing digital assets upon payment. 

  • Decentralized Applications (dApps): Within the Bitcoin network, smart contracts are used to power a host of decentralized applications (dApps) capable of executing intricate financial transactions without intermediaries. We will discuss these below.

Smart contracts are the new “it” thing as we watch bright minds and pioneering startups chart unknown territories in the Bitcoin blockchain. Let’s meet two of the top players (other than the Lightning Network) — Rootstock (RSK) and the Liquid Network — each revolutionizing this space in unique and novel ways.


The Wizards of Rootstock (RSK)

Now, RSK isn’t your average neighborhood sidechain. It’s the Hogwarts of Bitcoin smart contracts—merging the gap between Ethereum’s smart contract versatility and Bitcoin’s robust security!

Rootstock is the pioneering open-source smart contract platform driven by the Bitcoin network. Its mission is to enhance the Bitcoin ecosystem by introducing smart contracts, enabling nearly instantaneous payments, and expanding scalability.

Rootstock’s full technology stack, is built on Bitcoin, from its smart contracts to the Rootstock Infrastructure Framework. This stack aims to foster a more equitable and inclusive financial system.

Mining is the first point of contact. Bitcoin miners engage in what is known as merged mining, which simultaneously secures both the Bitcoin and Rootstock networks using the same infrastructure and energy consumption.

Every 10 minutes, these miners generate blocks on the Bitcoin network, processing Bitcoin transactions between addresses and minting new Bitcoins. On Rootstock, however, blocks are produced every 30 seconds specifically to support the execution of smart contracts.

Example of Rootstock 2-Way Peg

A24

While this process does not generate new coins, miners still receive rewards through merged mining.

For more information on mining, visit mine BTC with Rootstock.

With its sidechain sorcery, RSK enables your Bitcoin to be locked up cozily on the mainchain. At the same time, they virtually play on the RSK sidechain. This permits users to execute complex contracts without ever disturbing the mighty dragon hoard of Bitcoin.

NOTE: Smart contracts for RSK are written using Solidity (a Javascript like programming language) and are fully compatible with Ethereum Smart Contracts, so you can migrate your existing Ethereum Smart Contract to RSK without changing the smart contract.


Liquid Network: Your Assets on Ice Skates

Brought to you by the folks at Blockstream, Liquid Network has a name that makes you think of refreshing beverages, but it’s even cooler.

Picture your Bitcoin assets wearing ice skates—they glide faster and smoother on Liquid’s sidechain. It is designed to quicken Bitcoin transactions, and, as a bonus, it adds a layer of privacy that would make even a secret agent blush.

This platform is shaking things up, providing the ability to issue digital assets and, yes, deploy smart contracts with a sporty twist of Bitcoin security. A veritable cocktail for the digital age.

These projects are much like knights setting forth to expand the kingdom of Bitcoin, with visions of smart contracts galore—fostering a land where transactions are as smart as they are secure. It’s about creating a treasure horde that works for you, all the while shrouded in the impregnable armor of Bitcoin.


Getting Started with Bitcoin Smart Contracts

Some resources beginners might find helpful when exploring Bitcoin smart contract development.

  • Online Tutorials: Websites such as FreeCodeCamp offer tutorials that aid in understanding the basics of blockchain and how to code smart contracts].

  • Comprehensive Guides: Comprehensive guides available on Medium cover Bitcoin smart contract development and applications. These also stress the need for a solid understanding of Bitcoin’s scripting language.

  • Step-by-Step Guides: Resources like CoinGeek provide a step-by-step guide for developing Bitcoin smart contracts, including segments on design, development, testing, deployment, and invocation.

  • Blogs: Like those on Tectum provide overviews and insights into Bitcoin smart contracts.

Though you may not be excited about Bitcoin smart contracts as a Toxic Maxi, the one benefit they may provide is a brain drain from the broader crypto ecosystem to the one true kingdom of Bitcoin.

With Bitcoin’s simplicity, it’s easy to start testing and building your skills by attempting to write simple, smart contracts yourself. You can even do it on Bitcoin’s test net to avoid losing your precious sats.


Bitcoin Smart Contracts FAQ 

What Are Smart Contracts?

A: Smart contracts are self-executing contracts where the terms of the agreement between buyer and seller are directly written into lines of code. They automatically enforce and execute the terms of a contract based on predefined rules.

Can Bitcoin Really Execute Smart Contracts?

A: Yes, Bitcoin can execute smart contracts, although in a more limited capacity compared to platforms like Ethereum. Bitcoin’s scripting language, Script, allows for the creation of certain types of smart contracts, emphasizing security and simplicity.

How Do Bitcoin Smart Contracts Work?

A: Bitcoin smart contracts work by using Bitcoin’s scripting language to encode conditions into Bitcoin transactions. These conditions must be met for the transaction to be completed. This can include simple operations like multi-signature requirements or more complex conditions defined by the contract creator.

Are Bitcoin Smart Contracts Secure?

A: Bitcoin’s approach to smart contracts prioritizes security. The simplicity of Bitcoin’s scripting language reduces the surface area for potential attacks, making well-designed Bitcoin smart contracts highly secure. However, like all code, the security depends on the quality of the contract’s implementation.

What Makes Bitcoin Smart Contracts Different from Those on Ethereum?

A: The main difference lies in the complexity and capabilities. Ethereum’s smart contracts are more complex and flexible, allowing for a wider range of applications. Bitcoin smart contracts are simpler, which can lead to increased security but limits their functionality compared to Ethereum.

Can I Create a Bitcoin Smart Contract?

A: Yes, if you have some programming knowledge and understand Bitcoin’s scripting language, you can create Bitcoin smart contracts. Resources and communities are also available to help beginners learn how to develop smart contracts on Bitcoin.

What Are Some Use Cases for Bitcoin Smart Contracts?

A: Use cases include, but are not limited to, automated payments, escrow services, time-locked contracts, and certain types of decentralized finance (DeFi) applications. These applications leverage the security and reliability of the Bitcoin network.

Where Can I Learn More About Developing Bitcoin Smart Contracts?

A: Several online resources, tutorials, and community forums are dedicated to Bitcoin development, including smart contracts. Websites like Bitcoin.org, developer forums, and platforms such as GitHub can provide guidance and resources for those interested in learning more.


Wrapping Up the Bitcoin Smart Contract Story

Alright, friends, it’s time to Ctrl+S on our Bitcoin smart contract saga and save all the nuggets of wisdom we’ve uncovered. 

  • We built our knowledge on what smart contracts are, their history in the Bitcoin space, and why Bitcoin provides a better foundation for smart contracts than centralized crypto casino chains.

  • We dished out the starter pack for Bitcoin smart contract development, complete with online courses, dev kits, and a pinch of forum banter. Because even the best of us need a map to navigate the high seas of code.

  • We discussed the importance of community — your coding crew, debuggers-in-arms, and shoulder to cry on when the semicolon you missed was right there the whole time.

Education in Bitcoin is a marathon, not a sprint—unless you’re racing to snag that last Bitcoin pizza slice. And with the potential of smart contracts in your toolbox, who knows the digital domains you’ll conquer?

So, as we lay our smart contracts down to rest, here’s a little brain teaser to stir the pot: 

If a smart contract executes in the blockchain, and there’s no one around to transact, does it make a block? Share your philosophically cryptic or hilariously technical answers below, and let’s keep the learning and laughs rolling!

Until next time, remember to HODL onto your private keys and never stop exploring the Bitcoin cosmos!

You can start stacking sats with Swan Bitcoin today, with no fees for your first $10k in purchases.

Mickey Koss

Mickey Koss

Mickey Koss became a freelance writer in the Bitcoin space in an attempt to build a proof of work portfolio for when he left the Army. He graduated from West Point with a degree in Economics before serving in the Army for nearly a decade. He became orange pilled in graduate school and is now a regular contributor to Forbes, Bitcoin Magazine, and Bitcoin News. He’s been on popular podcasts such as BTC Sessions’ Why Are We Bullish, and is a regular on Café Bitcoin.

Drew

Drew

Drew, a class of 2013 Bitcoiner, is a Research Analyst for Swan Bitcoin.

He has worked in institutional VC/PE, FinTech, and DLT consulting for over six years. He also brings over twelve years of experience working with national nonprofits and start-ups in education and software development in several leadership roles.

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