Yes, you read it right.
Smart contracts are nothing new; computer scientist and cryptographer Nick Szabo came up with it as far back as 1994. About 10 years ago, they finally became ‘practical’ when the world welcomed its first cryptocurrency.
The most prominent platform for smart contracts nowadays is (still) Ethereum – with many others in the space. Some projects even introduced ‘real’ smart contracts which allow significantly more complex network-verified rules and restrictions. What may come as a surprise to most people is that the interest in smart contracts on Bitcoin is growing.
Why is this the case and how is this going to work? Or to go a step further, will it work at all?
When attempting to formulate an answer to the question, first, we need to have a clear understanding of what ‘smart contracts’ are.
What are Smart Contracts?
A smart contract is a simple and quick way to perform transactions using blockchain technology. In its core, it’s an agreement stating, ‘if this, then that’. This computer protocol is autonomous — executing without the help of any party and using only math. The code consists of the instructions that are agreed upon by everyone involved. It’s a trusted mechanism that all parties involved can trust completely, even if they don’t (fully) trust each other.
By offering unparalleled transparency, precision, speed, safety and redundancy, as well as eliminating the middleman, smart contracts could ultimately have a profound impact on many industries, from banking, insurance, and even as far as governments. Smart contracts enable exchanging anything of value in a conflict-free way. The general consensus is that we’ll mostly likely see the biggest impact in and around the financial sector.
Bitcoin Smart Contracts
It’s a common misconception that the Bitcoin blockchain lacks the ability to enable smart contracts. While Bitcoin has been associated with digital money, Ethereum focused on serving as a platform for the construction of decentralized applications. From the start, smart contracts set Ethereum apart from Bitcoin.
Now that the Bitcoin protocol has evolved, it has gained actual support for smart contracts. Using features added to Bitcoin through improvement proposals, certain smart contract functionality can be achieved through Bitcoin scripting. Bitcoin’s Lightning Network makes use of HTLC (Hashed Timelocked Contract) and multi-sig wallets, that is allowing less probability of programming bugs on their contracts.
By the end of this year, South-Korean startup Temco will launch the first initial coin offering (ICO) on Bitcoin. With a sidechain created by RSK — which they worked on for the last two years — this is now possible. As a supply chain and with such a vast amount of smart contract transactions to be made, security and cost-efficiency are key.
Smart Contracts: Bitcoin vs Ethereum
While Ethereum provides more extensible support for smart contracts, that type of flexibility also comes with a higher risk of security (and privacy) threats. The more code that goes into a smart contract, the greater the risk of introducing a vulnerability that could enable an intrusion. You’re essentially expanding the surface area for an attack.
In fact, over the last few years, we’ve witnessed the Ethereum blockchain face multiple exploits that lead to tremendous losses. On the other hand, Bitcoin allows developers to code smart contracts and decentralized applications that benefit from a more robust, stable and battle-tested environment. While there is not much room to play with in the coding language on Bitcoin, along with the difficulty to code dApps on the platform, the high level of security makes up for these coding limitations. However, these coding-related ‘limitations’ won’t necessarily make the dApps created on it less interesting.
Although Ethereum offers a stronger foundation for writing more complex smart contracts, Bitcoin (even with its limited smart contract functionality) makes an interesting alternative by providing a simpler and more reliable scripting framework (for private escrows)
Side note: For the sake of this article, we only used the comparison with Ethereum because it is the ‘original’ (and currently leading) smart contract blockchain. Certainly one of the biggest issues that still remains is scalability, as this holds back (potential) mass adoption. There are alternatives, however, and they’re just about ready to steal the throne. EOS, NEO, Universa, Cardano, Stellar, and Hyperledger (Fabric) are all different in terms of possibilities and complexity, but they’re out there.