20.12.2024
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Bitcoin and Ethereum, the two most popular blockchains, have unique approaches when it comes to smart contracts. While Ethereum is known as the biggest smart-contract platform, Bitcoin’s capabilities in this area are more restricted but progressing.
To understand the differences between Bitcoin and Ethereum smart contracts, it's important to explore how each network manages them, the programming languages they utilize, and the specific kinds of contracts they each support. This guide aims to clarify these differences.
A smart contract, the term coined by computer scientist Nick Szabo, is a computer program that executes automatically based on predefined conditions written into its code.
Szabo used the metaphor of a vending machine to simplify the idea of a smart contract: it can operate without a vendor employee as the user pays, selects an item, and the machine does the rest.
On a blockchain, a smart contract is a transaction-based program controlled by its predefined code, not by a user. It operates without a need for intermediaries to oversee transactions.
Smart contracts on Bitcoin have historically faced limitations due to the limited scripting language of Bitcoin Script. Bitcoin's creator, Satoshi Nakamoto, deliberately chose this limited language to reduce the risk of errors associated with more complex programming languages.
Despite these constraints, Bitcoin does support basic smart-contract features. Also, Bitcoin protocol upgrades, such as Taproot, have bolstered this blockchain’s smart-contract capabilities, among other improvements.
Moreover, Bitcoin scaling technologies like the Lightning Network leverage existing scripting functionalities to enable smart contracts for fast and cheap transactions.
In contrast, Ethereum was purposefully designed to streamline smart contracts and power decentralized applications (dapps). Its programming language, Solidity, used also by some other blockchains, is Turing complete, meaning that it can use other data-manipulation rule sets, giving developers more freedom to craft smart contracts. Ethereum smart contracts can also be written in other languages, such as Vyper.
Ethereum's programmability has established it as the choice for applications spanning from decentralized finance (DeFi) platforms to non-fungible token (NFT) marketplaces.
The structure of Ethereum enables a range of contracts to work together, fostering an environment where applications can interact. The Ethereum Virtual Machine (EVM), a virtual environment that executes code across all Ethereum nodes, is responsible for executing these contracts.
P2PKH is the most popular transaction type on Bitcoin as it is intended for simply sending BTC.
Without a signature and a public key, the recipient can't access these funds. Additionally, the script needs to verify the key, which is cryptographically hashed, and check the signature against the public key. By requiring the hash of the public key, P2PKH strengthens Bitcoin's security, which, at the moment, can't be broken by any known quantum algorithm.
HTLC transactions are valid for a specified period and are used for conditional payments, such as when establishing requirements for spending BTC.
For example, the contract may require several signatures to spend bitcoin within a specified time. HTLCs are also essential for the Lightning Network, where they operate as outputs of unconfirmed transactions to smart contracts and need to meet specific requirements.
P2SH allows you to send BTC to any P2SH address (which begins with 3) without needing to know how it is secured, as the locking script is replaced with the redeem script hash.
For example, the recipient might need multiple keys or meet other requirements to spend the funds. This is done by providing the script corresponding to the hash and meeting the set conditions. Moreover, P2SH makes BTC transactions cheaper because they use less block space..
DLCs use oracles for peer-to-peer BTC transactions, involving communicating real-world event data on-chain so the contract can self-execute according to its conditions.
DLCs can be used in financial agreements, such as bets. In this case, the betting parties lock funds in an address that is secured with a multisignature requirement. DLCs use a trusted oracle's signature as a private key, so the winner of the bet can spend the locked funds. DLCs are considered to be more private and efficient than other smart contracts that use oracles. They are also more secure due to their ability to detect fraud.
Ethereum’s adaptability allows for a range of contracts, which encompass the following functions:
Token contracts set the rules that help create and manage digital token standards like ERC-20 (used for fungible tokens), ERC-721 (for NFTs), and more.
ERCs provide guidelines for developing corresponding smart contracts. Token contracts also define rules and functions for how a token works and interacts with wallets, marketplaces, and other contracts.
Governance contracts support decentralized governance systems, such as decentralized autonomous organizations (DAOs), which empower token holders to participate in network governance.
Governance contracts set the rules for making decisions regarding protocol updates, new features, and smooth daily operations. These mechanisms can include public discussions and voting with the protocol's native coins. However, this approach is not without risks, as whales, or large token holders, might have an outsized influence over a project.
DeFi contracts drive decentralized finance use cases such as lending, borrowing, trading, yield farming, stablecoins, and more through dapps.
Smart contracts are crucial for DeFi as they enable platforms to operate in a decentralized, peer-to-peer manner and create sophisticated financial products. They also allow composability, which enables combining different components in the DeFi ecosystem. These programs are intended to be open for auditing to ensure transparency and security for DeFi users.
Gaming contracts play a vital role in blockchain-powered games by facilitating the management of in-game assets and interactions.
These programs help resolve trust issues between game publishers and gamers, increase transparency, and streamline payouts, which are managed by smart contracts and can be processed instantly.
Identity contracts are used for identity management in various blockchain-powered projects.
For example, if a user wants to sign in by scanning a QR code or through other means, a smart contract is triggered to establish the user's identity, determine what information they need to provide, and specify the next steps, such as what permissions the user is granted. All this data is encrypted, and a private cryptographic key is needed for authorization. This type of smart contract enables self-sovereign identity, data portability, and its monetization.
While Bitcoin has not traditionally been associated with smart-contract functionality, the landscape is evolving thanks to advancements such as the upcoming BitcoinOS smart layer.
Introducing any virtual machine (VM)-compatible execution environment to Bitcoin will empower developers to create Turing-complete smart contracts, significantly expanding the utility and scalability of Bitcoin. (However, a single rollup can be compatible with only one VM).
Spearheading this transformation is Sovryn, leading the charge in supporting the development of BitcoinOS. This upcoming ‘superchain’ of rollups, or a type of blockchain, operates on top of Bitcoin, offering a layer where various rollups can interact seamlessly. Dapps developed on different BitcoinOS rollups can communicate with each other, establishing this 'superchain' as a versatile and robust platform for developing sophisticated applications.
Sovryn has significantly contributed to the inception and progression of BitcoinOS by serving as a driving force behind this innovation. The team will also introduce new DeFi offerings, including its lending and borrowing system, on the BitcoinOS network.
Buy SOV today to participate in Sovryn’s Bitocracy and have your say in the new era of Bitcoin.
