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A Bitcoin smart contract is a set of conditions that determines whether a Bitcoin transaction can spend particular funds. Those conditions are enforced by Bitcoin’s transaction-validation rules, using Bitcoin Script. It is not usually a continuously running application with arbitrary, persistent program state.
What is a Bitcoin smart contract?
Bitcoin stores value in unspent transaction outputs, or UTXOs. An output can be locked with a script that sets conditions for spending it. When someone later creates a transaction to spend that output, Bitcoin nodes check whether the transaction provides what the script requires. If it does not, the spend is invalid.
The Bitcoin Developer Guide describes contracts as “transactions which use the decentralized Bitcoin system to enforce financial agreements.” In practical terms, a Bitcoin contract uses transaction rules to make funds spendable only through specified paths.
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Bitcoin Script can combine conditions such as required signatures, hash locks, and time locks. A signature condition can require approval from one or more key holders; a hash lock can require a value that matches a cryptographic hash; and a time lock can delay spending until a specified time or block condition is met.
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Miniscript provides a structured way to express and analyze a subset of Bitcoin scripts. BIP 379 describes how this approach can help assess whether spending conditions are correct, secure, and within resource limits. BIP 379 is marked Draft Informational; it is not an activated consensus upgrade.
How multisignature escrow works
The Bitcoin Developer Guide gives a 2-of-3 multisignature escrow as an example. A customer, merchant, and arbitrator each contribute a public key, and any two of the three signatures can authorize a spend. Depending on the agreed arrangement, the customer and merchant can settle together, either party can use a refund route with the arbitrator, or the arbitrator can help resolve a dispute.
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The script only enforces the agreed signature rules. It cannot independently determine whether goods arrived, whether a service was completed, or who is telling the truth. Those judgments depend on the participants and the contract’s dispute process.
What Taproot changes—and what it does not
Taproot outputs can be spent in two broad ways: with a signature for the output key (the key path), or by revealing a committed script and the proof that connects it to the output (the script path). Under the script path, the spending transaction reveals the selected script and its Merkle proof. Other committed script alternatives need not be disclosed when they are not used. These rules are defined in BIP 341.
BIP 342 specifies Tapscript, the execution rules for Taproot script-path spends. It updates script execution and signature-opcode behavior and sets resource rules. Taproot and Tapscript expand and organize Bitcoin’s spending conditions; they do not turn Bitcoin into an unrestricted, general-purpose virtual machine.
How Bitcoin contracts differ from general-purpose applications
A Bitcoin Script contract primarily answers a specific question: does this proposed transaction satisfy the conditions for spending this output? It does not, by itself, behave like an application that stays active between transactions and updates arbitrary internal state.
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The Ethereum whitepaper’s historical comparison discusses limits such as the lack of loops, persistent internal state, and broad access to blockchain data in Bitcoin’s scripting model. That is a comparative account, not a Bitcoin consensus specification. For current mechanics, the Taproot and Tapscript BIPs describe the applicable validation and resource rules. The practical distinction is that Bitcoin Script constrains UTXO spending; features requiring persistent application state or unrestricted computation need additional mechanisms or another execution environment.
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What determines a Bitcoin contract’s security?
A contract is only as reliable as its exact script, transaction construction, signatures, and assumptions about participants or outside information. A script can enforce a condition precisely, but it cannot verify a real-world event unless the transaction design provides a trustworthy way to represent that event. For escrow, that may mean relying on an arbitrator rather than expecting Bitcoin itself to decide a delivery dispute.
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