You get to say what happens to the funds if you can make the program return “TRUE. If you can’t, then you definitely don’t.
So, You do:
Your wallet software writes a little computer program for you and then sends it into the bitcoin network when you want to spend your money, here’s what. It efficiently claims to your system: “Please run this little system I’ve simply provided you. Then please look for a program (“smart contract”? ) on the working platform using this ID for me 
personally. You just located” when you’ve done that, feed the output from my program into program. Which means this is a two action procedure: you offer your own personal small system… together with production of the is given towards the UTXO program you want to pay.
How you spend some money in Bitcoin would be to ask the working platform to perform a little computer system which you provide and feed the production of this system towards the “smart contract” that is saving the funds you wish to invest. You get to spend the money if you can make this second program run successfully. The program you provide is “scriptSig” and the UTXO program is “scriptPubKey” in Bitcoin terminology. Your ultimate goal would be to give a “scriptSig” whose production may be given into “scriptPubKey” to really make it get back “TRUE”
Just what exactly are these small programs? They’re really simple in the common case. The “UTXO program” merely claims: “provide me personally with a digital signature that demonstrates you own the key from the following Bitcoin target (and please additionally demonstrate that you understand the general general public key that corresponds to your bitcoin target)”. That’s why it is called the “scriptPubKey”.
And also the system you offer is merely ways to guarantee the bitcoin system delivers this evidence to the scriptPubKey system into the right means. It’s a means of supplying a electronic signature. Ergo it’s called the “scriptSig”
Then you can’t generate the right signature and so you can’t create the input necessary to get the smart contract (scriptPubKey) to run successfully and you don’t get to spend the funds if you don’t know the private key. Which means this, apparently complex model, is merely an approach to make sure the sole one who can spend cash at address 1abcde… may be the one who understands the personal key… just as we might wish.
Just why is it this complex?
But notice just exactly how powerful this really is… due to the fact other thing you are doing is inform the machine to displace the existing scriptPubKey program with more than one brand new programs. And also this is just just how your payment is modelled when you look at the machine. You spend someone by making a program that is brand newa new scriptPubKey) that only they’ll certainly be in a position to perform effectively. In this manner, it is possible to spend differing people or deliver modification back into your self. This program that just it is possible to run is changed with people that only the payees can run. And, in this way, the worth happens to be passed away away from you in their mind.
And so the outcome is that the program that is original in the ledger is changed by more than one new programs. Within the case that is usual a number of of the brand brand new people is going to be connected with somebody else’s bitcoin target therefore just they’ll be in a position to get a handle on it. You have got, in place, paid them that cash because the funds are actually under their control
Having to pay somebody in Bitcoin matches replacing the system you control with people they control. The funds you controlled have now been split between two new recipients in this diagram. Just those funds can be spent by them.
Smart Contracts?
So so what performs this need to do with smart agreements? The important thing is the fact that the model I outlined above is quite generic. The program writing language is (pretty much) powerful adequate to implement some interesting company logic that goes beyond “Richard paying money to Bob”. For instance, you can easily compose a course which will only return “TRUE” that you know the private key to multiple bitcoin addresses if you provide proof. This will be a option to model “a almost all Board Directors must jointly signal before these funds can be spent”, maybe. The Bitcoin “contracts” wiki page gets into a lot more level.
Nevertheless, the truth is that the abilities associated with the platform are now quite constrained – and i do believe this describes most of the fascination with other platforms, such as for instance Ethereum. Nevertheless, it ought to be noted that Gavin Andresen has argued that Bitcoin’s limits will not need to be a constraint.
What exactly?
Some might argue so it’s not required to take into account Bitcoin in this manner. But i do believe that could be a error. Because, while a lot of people are receiving worked up about the prospective of smart agreements for company, we’ve had an enhanced smart agreement platform operating quite effectively for over fifty per cent of a ten years, by means of the Bitcoin community.
Sure – it is not a lot of (that’s why systems like Ethereum are becoming built). However it may be a blunder to bet so it won’t evolve.
Eventually, my point is it: no matter if there’s a low possibility of success for the possibly troublesome system, it certainly is practical to comprehend every thing feasible in what that system can really do…
Disclosure – I provide solid advice to Hyperledger in your own capability.
Update – 2015-03-30 Typos and replaced very first diagram… we inadvertently included a mature variation which used random IDs for UTXOs that appeared to be bitcoin details, that has been extremely confusing…
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