Most people consider Bitcoin a form of money. However, it’s gaining more popularity for its use in smart contracts. Currently, this cryptocurrency’s capital remains predominantly idle. That’s because about 76% of the Bitcoin supply is illiquid. It doesn’t have any transaction history. Therefore, there’s a significant opportunity for unlocking Bitcoin productivity by expanding smart contracts. If the Bitcoin network program more smart contracts, it will accelerate its mainstream adoption as a financial service and value storage.
What Are Smart Contracts?
Smart contracts are blockchain programs that run when parties meet predetermined conditions. Typically, people and organizations use them to automate agreement execution to ensure the participants are sure about the outcome without involving an intermediary or losing time. Also, organizations and individuals can use them to automate workflow by triggering certain actions after the parties meet specific conditions.
Bitcoin has relatively simple smart contracts on the main chain. Also, it has more complex smart contracts which developers programmed with its layers. However, Bitcoin doesn’t always come up when people discuss smart contracts. That’s because it has a limited scripting language, making it inferior to modern standards concerning blockchain programmability.
How Bitcoin Smart Contracts Work
Bitcoin smart contracts are either on its mainchain or layered solution. Bitcoin Script or scripting language is relatively simple, making complex smart contracts challenging to deploy on a base layer. Satoshi Nakamoto designed Bitcoin to be relatively unmodified and straightforward to maintain its blockchain’s durability and integrity. That’s why people can access and use it on a prominent crypto exchange like Yuan Pay Group without understanding its underlying technology.
Bitcoin’s Base Layer Smart Contracts
Although protocol upgrades occur periodically, the developer hoped they could keep the blockchain the same. They only provide minor enhancements on the edges. Here are the basic smart contract functionalities on Bitcoin’s base layer.
Pay-to-public-key-hash (P2PKH)
P2PKH is a typical contract that people use in Bitcoin transactions. The script establishes contracts whose execution is by a public key. Also, corresponding private keys create a signature.
Multi-Signature (Multisig)
Multisig is a Bitcoin address requiring transaction approval by multiple parties before its completion. Most parties use it to execute agreements with predefined signatures to perform some actions, like releasing funds.
Hash Time Lock Contract (HTLC)
HTLC is a conditional crypto transaction whose contingencies are time-bound. It has hardcoded time constraints, and the parties release Bitcoin at a specific date and time. Transaction cancellation occurs when the parties fail to meet specific requirements within the preset deadline.
Discreet Log Contracts (DLCs)
DLCs use oracles in executing trustless P2P transactions. The Oracles can evaluate real-world events’ outcomes and provide on-chain information for smart contracts. Most parties use DLCs when they commit to a financial agreement or based on results.
Pay-to-Taproot (P2TR)
The P2TR script sends Bitcoin while introducing Schnorr Signatures and Merkle Trees. These transactions provide lower transaction fees and better security. Also, they enhance flexibility. The Taproot Upgrade introduced this contract.
Bitcoin Layers Smart Contracts
Bitcoin has unique layers that may introduce new features without modifying the network’s main chain. Instead of changing the Bitcoin code, developers can introduce experimental developments and innovations without altering this cryptocurrency’s blockchain. That way, Bitcoin core remains unaffected and straightforward.
Ultimately, users settle Bitcoin layer transactions on its base layer. That means every transaction’s history is on the Bitcoin ledger. And this is the gold standard for immutability, security, and durability on the blockchain. The verification degree sets the Bitcoin blockchain apart from the other networks. Altering a layer transaction requires changing the mainchain transaction. And this is almost impossible.
Bitcoin smart contracts whose execution is on the layers provide the following advantages:
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Higher scalability
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Greater programmability
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Better efficiency
Some of the platforms where users can create Bitcoin-powered smart contracts include Rootstock and Stacks. However, such venues are increasing since this cryptocurrency has a globally known presence as a digital asset and a payment system.