diff --git a/Cargo.toml b/Cargo.toml
new file mode 100644
index 00000000..29d8f789
--- /dev/null
+++ b/Cargo.toml
@@ -0,0 +1,10 @@
+[package]
+name = "koii-contract-error-handling"
+version = "0.1.0"
+edition = "2021"
+
+[dependencies]
+thiserror = "1.0"
+
+[dev-dependencies]
+rstest = "0.18.2"
\ No newline at end of file
diff --git a/src/errors/mod.rs b/src/errors/mod.rs
new file mode 100644
index 00000000..b5b63591
--- /dev/null
+++ b/src/errors/mod.rs
@@ -0,0 +1,74 @@
+use thiserror::Error;
+
+/// Comprehensive error enum for smart contract operations
+#[derive(Error, Debug, Clone, PartialEq)]
+pub enum ContractError {
+    /// Generic initialization error
+    #[error("Initialization failed: {0}")]
+    InitializationError(String),
+
+    /// Token transfer validation error
+    #[error("Invalid token transfer: {0}")]
+    TokenTransferError(String),
+
+    /// Authorization and permission-related errors
+    #[error("Authorization failed: {0}")]
+    AuthorizationError(String),
+
+    /// Validation errors for input parameters
+    #[error("Invalid input: {0}")]
+    ValidationError(String),
+
+    /// Resource not found errors
+    #[error("Resource not found: {0}")]
+    ResourceNotFoundError(String),
+
+    /// Arithmetic or computational errors
+    #[error("Computation error: {0}")]
+    ComputationError(String),
+
+    /// Generic unexpected error
+    #[error("Unexpected error occurred: {0}")]
+    UnexpectedError(String),
+}
+
+/// Result type using our custom ContractError
+pub type ContractResult<T> = Result<T, ContractError>;
+
+/// Utility functions for error handling
+impl ContractError {
+    /// Create a new initialization error
+    pub fn initialization(message: impl ToString) -> Self {
+        ContractError::InitializationError(message.to_string())
+    }
+
+    /// Create a new token transfer error
+    pub fn token_transfer(message: impl ToString) -> Self {
+        ContractError::TokenTransferError(message.to_string())
+    }
+
+    /// Create a new authorization error
+    pub fn authorization(message: impl ToString) -> Self {
+        ContractError::AuthorizationError(message.to_string())
+    }
+
+    /// Create a new validation error
+    pub fn validation(message: impl ToString) -> Self {
+        ContractError::ValidationError(message.to_string())
+    }
+
+    /// Create a new resource not found error
+    pub fn resource_not_found(message: impl ToString) -> Self {
+        ContractError::ResourceNotFoundError(message.to_string())
+    }
+
+    /// Create a new computation error
+    pub fn computation(message: impl ToString) -> Self {
+        ContractError::ComputationError(message.to_string())
+    }
+
+    /// Create a new unexpected error
+    pub fn unexpected(message: impl ToString) -> Self {
+        ContractError::UnexpectedError(message.to_string())
+    }
+}
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diff --git a/tests/error_handling_tests.rs b/tests/error_handling_tests.rs
new file mode 100644
index 00000000..f7209de8
--- /dev/null
+++ b/tests/error_handling_tests.rs
@@ -0,0 +1,70 @@
+use std::error::Error;
+use std::fmt::Display;
+
+mod errors {
+    pub(crate) use crate::src::errors::{ContractError, ContractResult};
+}
+
+#[test]
+fn test_error_creation() {
+    // Test initialization error
+    let init_error = errors::ContractError::initialization("Database connection failed");
+    assert_eq!(
+        init_error.to_string(),
+        "Initialization failed: Database connection failed"
+    );
+
+    // Test token transfer error
+    let transfer_error = errors::ContractError::token_transfer("Insufficient balance");
+    assert_eq!(
+        transfer_error.to_string(),
+        "Invalid token transfer: Insufficient balance"
+    );
+
+    // Test authorization error
+    let auth_error = errors::ContractError::authorization("Permission denied");
+    assert_eq!(
+        auth_error.to_string(),
+        "Authorization failed: Permission denied"
+    );
+}
+
+#[test]
+fn test_error_conversion() {
+    // Test validation error
+    let validation_error = errors::ContractError::validation("Invalid input format");
+    assert_eq!(
+        validation_error.to_string(),
+        "Invalid input: Invalid input format"
+    );
+
+    // Test resource not found error
+    let not_found_error = errors::ContractError::resource_not_found("User account");
+    assert_eq!(
+        not_found_error.to_string(),
+        "Resource not found: User account"
+    );
+}
+
+#[test]
+fn test_error_propagation() {
+    fn simulate_operation() -> errors::ContractResult<()> {
+        Err(errors::ContractError::computation("Math overflow"))
+    }
+
+    let result = simulate_operation();
+    assert!(result.is_err());
+    
+    if let Err(err) = result {
+        assert_eq!(err.to_string(), "Computation error: Math overflow");
+    }
+}
+
+#[test]
+fn test_unexpected_error() {
+    let unexpected = errors::ContractError::unexpected("Unhandled system error");
+    assert_eq!(
+        unexpected.to_string(),
+        "Unexpected error occurred: Unhandled system error"
+    );
+}
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