An ongoing debate within the Bitcoin technical community has recently gained momentum and is causing a lot of ink to flow on the networks. It can be difficult to constantly keep up with the influx of new proposals for improving Bitcoin. These are officially proposed in the form of BIPs (Bitcoin Improvement Proposals).
BIPs that are currently causing a lot of controversy are classified as Covenants.
Simply put, covenants are restrictions that Bitcoin users can apply to their Bitcoin transactions. These restrictions are in fact special conditions that allow greater malleability of transactions.
In this article, we will introduce the concept of Covenantstheir reason for being and evaluate the advantages and controversies surrounding them.
The last great revolution of Bitcoin -Taproot
THE Bitcoin, although the first cryptocurrency and having the largest capitalization on the market, generally evolves less quickly than the others. This is due to a whole set of factors often summarized by the term ossification in its protocol.
In short, any new improvement to Bitcoin cannot change the original rules of Bitcoin and can only be introduced through a soft-fork method. Technically speaking, this makes the task considerably more complex compared to other cryptocurrencies which can proceed through a hard fork and therefore significantly change the protocol code.
So far, this method has been beneficial for Bitcoin, as Bitcoin’s decentralization has been preserved over time and Bitcoin’s uptime remains the highest of any other network or computer system in the world – 99.98%.
However, this also implies that Bitcoin evolves more slowly and this generally causes a lot of frustration among some users or coders who would like to see it evolve more quickly.
For example, the last major improvement to the protocol, Taproot, was implemented on November 14, 2021, more than two years ago.
Obviously, following the implementation of Taprootthe community quickly began discussing the next big improvement.
THE Covenants are at the heart of the debate.
Brief technical explanation of covenants
THE Covenants are additional restrictions that Bitcoin users can apply on their Bitcoin transactions in order to be more flexible and complex with their Bitcoin transactions.
THE Bitcoin transactions are constructed as scripts. Currently, scripts can only determine how an existing Unspent Transaction Output (UTXO) can be spent.
THE Covenants allow you to apply conditions to non-existing or future UTXOs. This would be possible through a set of pre-signed transactions that could be completed and validated based on certain conditions established by the transaction creator.
THE Covenants are crucial for scalability and the development of second layers and this constitutes the main argument of those who are in a hurry to implement them.
Concerns and state of the discussion on the Covenants
Currently, there is more than one fifteen proposals for Covenants that have been discussed over the past decade. Initially, the introduction of these new restrictions was generally quite rejected by the community, as developers and users feared that they would introduce new attack vectors or potential avenues for controlling Bitcoin.
For example, some Covenants could introduce the condition that a third party should give consent before a transaction is validated. Thanks to this type of Covenanta government authority could require that each user withdrawal from exchanges should be published as a transaction conditional on the approval of a second signature in order to be valid.
However, this is not much different from a 2/2 multi-signature transaction which is already possible today. It turns out that many of the fears related to Covenants rather reveal already existing problems in Bitcoin.
Today, the majority of major concerns have been greatly alleviateds thanks to in-depth analyzes of different scenarios.
However, there are several camps among those who wish to introduce Covenants and now people are debating which *Covenant* to introduce first.
What Covenant proposals are there today?
Here is a non-exhaustive list of Covenants that have been proposed over the years. Some are at more advanced stages of discussion and acceptance while others are not yet mature or have been abandoned.
This list is taken from the Jameson Loop article. As mentioned above, some of them are heavily discussed, like OP_CAT and OP_CHECKTEMPLATEVERIFY.
even though Covenants are still controversial, it is generally accepted that one day or another it will be necessary to introduce some of them in order to facilitate the scalability and programmability of Bitcoin.
Useful uses of Covenants
Security and Self-Custody
THE Covenants will greatly increase the flexibility and security of Bitcoin holders, because the user will be able to determine exactly how their bitcoins can be spent. For example, here are some of the restrictions that a user can apply using the Covenants:
A user will be able to determine after how long their Bitcoin holdings can be transferred. This could be useful, for example, in the case of inheritance. The heirs of a Bitcoin fortune would therefore not be able to recover the coins until a certain amount of time has passed. Or, conversely, if after 10 years the bitcoins in a certain wallet have not moved, a transaction is automatically formed and sent to another wallet.
THE Covenants also make it possible to precisely determine the amount that a person can withdraw with a transaction from a Bitcoin wallet. For example, a Bitcoin holder with 10 bitcoins might determine that it is only possible to withdraw one bitcoin at a time. If an attacker takes possession of the wallet, it could take them longer, and therefore the holder would potentially have a window of time that would allow them to recover part of their assets.
THE Covenants also make it possible to determine the frequency with which transactions in a certain wallet could be carried out.
With the current conditions of the Bitcoin scripting language, it is only possible to determine who is able to spend the Bitcoins of a certain wallet through the Inputs. With the Covenantsit would also be possible to determine who can receive bitcoins in a certain transaction through the Outputs. Thus, the transaction cannot be validated if it is not intended for an address or a batch of addresses predetermined by the holder of the original wallet.
Thus, an attacker who takes possession of a wallet could not even send the coins to a destination other than the one previously determined.
- What is the magic formula?
With a combination of these different rules, users have much more flexibility when it comes to security. A user who owns 10 bitcoins might determine that just 0.25 bitcoins can leave their wallet every 2 weeks to a trusted address, greatly reducing the chances of a total theft of their assets. The possibilities are limitless.
Scalability
Another big argument in favor of the introduction of Covenants is here scalability of Bitcoin.
According to the original document of Lightning Networka theoretical limit on the use of Bitcoin would be capped at 100 million people if each of these people uses the Lightning Network exclusively and only makes one transaction on the main chain per year.
Obviously, this doesn’t take into account the main chain transactions that Bitcoin users make and so the true limit is much smaller.
The Lightning Network is therefore a partial solution for the scalability of Bitcoin, other solutions are necessary to allow a large population to use Bitcoin.
- Sharing of UTXOs by different parties on the first chain
THE Covenants would allow, similar to the Lightning Network, to carry out off-chain transactions thanks to a set of conditional transactions.
Thus, several users could carry out several transactions through a single one thanks to a multi-signature transaction which would determine exactly the amounts which are owed to each one. This type of transaction is impossible without the introduction of certain proposals of Covenants.
Ark is a proposal for a relatively new second-layer protocol, like the Lightning Network, which aims to offer anonymous, off-main-chain, low-cost payments through Ark Service Providers (ASPs).
This protocol works through a system of off-chain VUTXOs (virtual UTXOs) which are representations of UTXOs indexed at a 1:1 ratio with Bitcoin on the first chain. Inside the Ark system, Coinjoin-type transactions make it possible to preserve anonymity and settle transactions taking place in the system.
However, before being truly functional, Ark needs some Covenants are activated to be operational.
Batching is a method of transferring Bitcoin which consists of agglomerating several Inputs into a single transaction in order to minimize the footprint it takes on the main chain. This method helps minimize costs and avoids taking up space in the chain unnecessarily.
This method is already used today by many players, but it could be greatly optimized thanks to Covenants.
The biggest potential users of this technique are exchanges, as they must regularly perform large withdrawal transactions for their users.
Conclusion
In short, apart from the influential forces of large financial players as well as miners, the future of the Bitcoin protocol is also decided in developer forums and discussions on social networks.
THE Covenantsno matter which of them are accepted and integrated into the protocol, will propel Bitcoin into a new era of programmability and scalability.
We will monitor developments closely to provide a clear perspective on these issues.
In the meantime, we invite you to take a deep dive into this set of resources that were used to produce this introduction. The subject of *Covenants* is wide-ranging and constantly evolving.
Resources :
https://twitter.com/rot13maxi/status/1758268837542113612
https://www.samara-ag.com/market-insights/ark-layer-2-protocol
https://www.rhinobitcoin.com/blog/bitcoin-covenants-can-we-scale-beyond-100m-users#:~:text=Payment%20channels%20are%20another%20example,transaction%20fees%2C%20and %20improving%20scalability
https://hashrateindex.com/blog/op-ctv-bip-119-guide/
https://cointelegraph.com/explained/what-are-bitcoin-covenants-and-how-do-they-work
https://fountain.fm/episode/abBQbAO06PUYTnD0uYja
https://prestmit.com/blog/what-are-bitcoin-covenants-and-how-does-it-work/
https://www.rhinobitcoin.com/blog/bitcoin-covenants-can-we-scale-beyond-100m-users
https://bitcoinmagazine.com/technical/youll-activate-the-covenants-and-youll-like-it
https://maltemoeser.de/paper/covenants.pdf
https://bitcoinops.org/en/topics/covenants/?ref=blog.keys.casa
https://buybitcoinworldwide.com/bitcoin-uptime/