A smart contract is a digitized agreement that is implemented automatically depending on established parameters. A smart contract may, for example, stipulate that Bitcoin should be electronically delivered from one user to another using a Bitcoin Wallet when a particular amount of time has passed. Smart contracts can be exceedingly complicated, needing several conditional conditions, or as simple as just an electronic signature to spend money.
Using its strong programming language, Script, the Bitcoin network enables a variety of smart contracts. Users may set criteria for how their Bitcoin should be spent using scripts, and Bitcoin transactions bind particular amounts of Bitcoin to these scripts. To use the Bitcoin tied to the script, a user must meet these requirements. All Cryptocurrencies are thus smart contracts.
Pay-to-Public-Key-Hash is the most prevalent Bitcoin script type (P2PKH). P2PKH scripts enable Bitcoin to be transmitted to a Bitcoin that can only be spent by the owner of the accompanying private key.
On a practical level, P2PKH scripts specify that a user must give an ECDSA signature that fits the public key whose hash is supplied by the script to spend bitcoin. Because only the owner of the private key matching to the public key hash can make a valid signature, the Bitcoin belongs entirely to the holder of the private key.
Multi-Sign Scripts
Unlike P2PKH scripts, which only require one signature, multisig scripts can demand any number of signatures, from any number of users. The following is how multi-signature scripts function. There is a list of n public keys and a variable m that is less than or equal to n. Only m signatures, each of which corresponds to one of the n public keys specified, may be used to spend the Bitcoin locked to this script. M-of-n multisig is the name given to this concept.
Two signatures from a group of three public keys are required in a 2-of-3 multisig arrangement. This permits three parties to jointly keep cash while assuring that no one party can hijack the funds or prevent the mass from spending them as they see fit. Decentralized services like Bisq employs 2-of-3 multisig for trust-minimized escrow.
Time–Locked Crypto Transactions
Cryptocurrency transactions can be time-locked, which means they expire after a set period of time. Time locks can also be used in conjunction with locking scripts to alter a bitcoin’s spending criteria. For instance, a script may demand three signatures to spend Bitcoin before a deadline, but only one signature after that. This allows for backup choices, hopefully avoiding a loss of cash.
Pay-to-Script-Hash (P2SH)
The Pay-to-Script-Hash (P2SH) protocol, which was expanded to include P2WSH as part of the SegWit upgrade, allows for arbitrary complicated scripts. Bitcoin may be transferred to the hash of any script, including any of the previous instances, using P2SH and P2WSH smart contracts. This solution reduces the cost of transmitting Bitcoin easily to a sophisticated smart contract while also ensuring that the Bitcoin is kept private until it is used.