As defined in the Bitcoin core developer guide, contracts are basically transactions that use the Bitcoin system to enforce a financial agreement. This is a simple definition but has far-reaching consequences as it allows users to design complex contracts that can be used in many real-world scenarios. Contracts allow the development of a completely decentralized, independent, and reduced risk platform.

Various contracts, such as escrow, arbitration, and micropayment channels, can be built using the Bitcoin scripting language. The current implementation of a script is very limited, but various types of contracts are still possible to develop. For example, the release of funds only if multiple parties sign the transaction or perhaps the release of funds only after a certain time has elapsed. Both of these scenarios can be realized using multisig and transaction lock time options.