Tag: utxo

A Smart Contract Platform on Bitcoin?

Consider the following question. Is it possible to use the Bitcoin blockchain for smart contracts? By this, I am not asking how far we can push the rather limited functionality of the native Bitcoin Script. Rather, can we write code for something like the Ethereum Virtual Machine (EVM), which is a Turing complete computation engine used by the Ethereum blockchain, and run on Bitcoin? This would enable a great variety of different uses for Bitcoin, such as ERC20 tokens, decentralized exchanges (DEX), NFTs, zk-STARKS, and any of the many different types of contract used by Ethereum.

While your first answer to the question above is probably “no, this is not possible”, there is one way in which it can be done with, albeit, a rather large caveat. Bitcoin transaction outputs incorporate a script, which is a simple stack-based programming language used to restrict how the coins can be spent. Output scripts starting with the OP_RETURN opcode cannot be spent in any way. More than this, they are provably unspendable, so are ignored by Bitcoin nodes which do not even record such outputs in the UTXO set. The output quantity would likely to be set to zero, so as to avoid irretrievably destroying any bitcoin associated with the output. This means that we can include any arbitrary data following the OP_RETURN to be recorded on the blockchain, which is simply ignored by all validating nodes. This is one of the uses of Bitcoin, as an immutable and decentralized store of data.

smart contracts
Figure 1: Smart contract transactions in OP_RETURN statements.

So, all we have to do, is to include smart contract code in OP_RETURN outputs using whatever language, such as EVM, that we want. Ok, this does not form part of the protocol, so is ignored by Bitcoin nodes. Blockchain explorers would show the code as raw data, but would not interpret the contract language. This is a rather large caveat, and you may well reply that it is not really ‘running’ on Bitcoin and, really, all that we are doing is using the blockchain as data storage. However, it is interesting to consider and, even if due to reasons to be discussed below, it is not very efficient, these methods are implemented by the Omni Layer and also lead on to ideas such as Proof of Transfer. Continue reading “A Smart Contract Platform on Bitcoin?” →

The UTXO Model

utxo

Any digital currency requires a method of representing quantities of the asset held by any parties, and transactions of these. The two main methods are the account model and the utxo (unspent transaction output) model, the latter of which is used by Bitcoin and which I will describe here.

I start with the idea of a transaction, which is simply a block of data containing a list of zero or more outputs and a list of zero or more inputs. Each of the outputs needs to contain a nonnegative number giving the associated quantity of the asset, and each of the inputs needs to contain a reference to the output of another transaction which it is spending. Note that it is not necessary for the inputs to contain the quantity, since this will be provided by the transaction output that it references. Each of the transaction outputs (txo) can only occur as an input of another transaction at most once. It must also be possible to arrange the transactions in order so that each input can only reference the output of an earlier transaction. By linking the inputs of each transaction with the referenced outputs, we obtain what is referred to as a directed acyclic graph (DAG).

transactions DAG
Figure 1: Transactions connected to form a directed acyclic graph.

Figure 1 gives an example with 6 transactions in total. The first two have no inputs but have outputs summing to 10, so both create 10 bitcoins out of nothing. The remaining transactions have the sum of their output quantities equal to the sum of their input quantities, so redistribute bitcoin but do not destroy or create any. Continue reading “The UTXO Model” →