The Ethereum (ETH) network is best known for smart contracts, which offer full Turing smart contracts that enable decentralized product and service development. However, what not everyone may realize is that smart contracts also exist on Bitcoin (BTC).
Read on to learn about Bitcoin smart contracts and the different projects that push smart contract functionality to the top of the Bitcoin network.
Bitcoin Smart Contracts: What Is Possible With Script?
A smart contract is a coded agreement between two or more parties that is executed automatically when predefined criteria are met.
For example, a Bitcoin smart contract could stipulate that a BTC payment must be sent from one person to another once an accepted task is completed.
The Bitcoin network supports different types of smart contracts via Script, which is the scripting language it uses.
Using the Script, users can create different criteria on how their BTC is to be used. Additionally, the scripts can also lock certain amounts of BTC to specific Bitcoin transactions, as users must be able to meet these criteria before they can spend BTC locked onto this script.
Examples of Bitcoin Smart Contracts
In the more than ten years that the script has been used in the Bitcoin protocol, it has proven to be a useful programming language that supports a wide variety of Bitcoin smart contracts, such as the simpler Public Key Hash (P2PKH). to more complex software such as multi-signature scripts, pay-to-script hash (P2SH), and time-delayed transactions.
Let’s take a look at the most common types of scripts used by Bitcoin.
Pay for Public Key Hash (P2PKH)
P2PKH is a simple and popular script that allows users to send BTC to a bitcoin address. It is the basic form of conducting a transaction on the Bitcoin network.
Time Deferred Transactions
A time-delayed bitcoin transaction is a type of smart contract that controls the spending of bitcoin even after a certain period. Time locks are very popular and are used in many bitcoin smart contracts.
For example, a time-locked script could dictate that three signatures are required in order to spend a certain amount of bitcoin before a specified period, after which only one signature will be needed. Time-locked transactions are excellent because they help prevent money loss.
Unlike P2PKH scripts that require a single signature, a multi-signature or multi-signature script can require multiple signatures belonging to multiple users. Multi-signature scripts work by creating a request where N public keys are registered in the script and an M number of signature is needed to unlock the funds.
This means that the amount of bitcoin locked to this type of script cannot be spent unless M signatures are issued and each needs to match one of the N public key terms. This concept is known as M-of-N multi-signature. In this case, N stands for the total number of public keys included and N is the minimum number of signatures needed to validate the transaction.
Pay-for-Script Hash (P2SH)
Pay-for-Script Hash (P2SH) is a standard that is scored to enable the creation of complex scripts. The P2SH script does not run independently. Instead, it includes the P2WSH script, which became after the SegWit upgrade. The two scripts work together to make it possible to send Bitcoin to a hash of any script.
Layers of the Bitcoin Smart Contract: What’s Possible on Top of Bitcoin
Due to the limitations of the Bitcoin programming language, Bitcoin developers have worked on new layers on top of the Bitcoin blockchain to enable more complex smart contract development for Bitcoin-powered applications.
The most popular classes of smart contracts built on Bitcoin include RottstockAnd liquidAnd the pilesAnd LightningAnd RBG. Let’s take a quick look at each of the five projects.
Rootstock (RSK) is a smart contract platform that includes a full Turing virtual machine to connect to the Bitcoin blockchain.
Full smart contracts provided by RSK is a concept that was first proposed by computer scientist Nick Szabo back in 1993. Because RSK operates as a sub-chain of Bitcoin, it enables developers to build decentralized applications secured by the Bitcoin network without being tied to the Bitcoin network . Bitcoin programming language.
Bitcoin DeFi applications are already running on RSK, powered by RSK Smart Bitcoin (rBTC). rBTC is bound to BTC 1:1 and is generated by sending BTC to a multisig address managed by RSK PowPeg (Bi-Directional Binding Protocol).
The Liquid Network was launched in 2018 by a major blockchain technology company Blockstream. Although it has attracted relatively moderate usage since its inception, it has managed to provide transactions geared towards the needs of brokers, exchanges, financial institutions, and market makers.
As a sub-chain of Bitcoin, Liquid Network is designed to meet the needs of the business and not necessarily the average Bitcoin user. Liquid Network is also using Liquid Bitcoin (L-BTC) as an asset.
As a Bitcoin smart contract layer, it gives users the ability to provide assets in the form of tokens such as stablecoins. In addition, Bitcoin NFTs can also be issued on the liquid network.
Stacks is a Layer 1 blockchain connected to Bitcoin through its consensus mechanism known as Proof of Transfer (PoX). It leverages Bitcoin’s economic strength, security, and stability to bring smart contracts into Bitcoin.
For applications built on Stacks because they are connected to the Bitcoin blockchain, the Bitcoin layer always acts as the final layer, while the smart contract is built on the Stacks chain.
Similar to the other layers, Stacks addresses the issue of the utility and scalability of the Bitcoin network, while pushing for the development of a decentralized digital economy secured by Bitcoin.
The Lightning Network (LN) was first proposed by Joseph Poon and Thaddeus Dryja in 2015. It is a layer 2 technology that uses payment channels to enhance the ability of the Bitcoin network to conduct transactions in an efficient manner.
LN relies on multi-transaction smart contracts, called time-locked contracts (HTLCs), to enable lightning-fast bitcoin transfers with virtually no fees.
The Lightning Network is designed to help remove transactions from the main (off-chain) blockchain network, helping to lower transaction fees and decongest the Bitcoin blockchain.
RGB is a set of protocols that provide smart contracts for Bitcoin and the Lightning Network. It is client-side and its smart contract system runs on the second and third layers of the Bitcoin ecosystem.
RGB, unlike other existing Bitcoin smart contracts, does not require token generation. Instead, it helps with the concept of separation between the smart contract issuer, the state development, and the state owners. As a smart contract system, RGB uses the blockchain as a government commitment layer and Bitcoin script as a proprietary control system. The evolution of its smart contract is determined by an off-chain scheme.
While the Bitcoin ecosystem has nowhere near as many decentralized applications as leading smart contract chains like Ethereum, a growing number of Bitcoin developers are devoting their time and energy to building a decentralized economy on top of the world’s most secure blockchain.
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