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Bitcoin Covenants - How Do They Work?

Bitcoin covenants specifically limit where and how coins can be transferred after being purchased.

These limitations are comparable to those that banks may impose on particular merchants whom they suspect of engaging in illegal activity.

Covenants are a good way to make Bitcoin better, but they haven't been studied much in recent years because they are hard to implement and raise questions about the currency's ability to be used for different things and to avoid being censored.

Bitcoin, Ethereum, and Dogecoin placed on top of each other
Bitcoin, Ethereum, and Dogecoin placed on top of each other

Can Bitcoin Be Made Better?

Bitcoin can definitely be made better, and covenants, such as BIPs, suggest ways to change the consensus model.

Covenants are a part of Bitcoin Improvement Proposals (BIPs), which are the process of updating and improving Bitcoin to fix problems with scalability, security, and usability.

With the help of covenants, a Bitcoin script language can stop legitimate spenders from using their funds on particular other scripts.

They explain how to enhance Bitcoin using smart contracts, which are pieces of code that run when specific criteria are met.

Two worker toys fixing Bitcoin chip
Two worker toys fixing Bitcoin chip

How Do Bitcoin Covenants Work?

It is possible to define covenants as linguistic primitives, which are the smallest and most basic "units of processing" that are available to a programmer.

Covenants are an extension of the Bitcoin script language that makes it possible for transactions to restrict the scripts of redeemed ones.

In a typical Bitcoin transaction, your bitcoin is secured by a locking script; in order to spend the coins, the script's requirements must first be satisfied.

Timelocks, which are similar to covenants in that they indicate that coins can't be spent until after a certain number of blocks have passed, are another type of locking condition.

One example of a locking condition is that you can't spend money unless you sign a document that shows you have a private key that matches the public key.

So, whereas in a "normal" Bitcoin script we only require certain conditions to be met in order to unlock a particular requirement (for example, signing a transaction with a private key), in a covenant we go one step further by restricting what you can do with that coin, or where a coin can be spent.

This is different from a "normal" Bitcoin script, where we only need to meet certain conditions to unlock a certain requirement.

Most of the time, a Bitcoin covenant is defined as "a way to enforce rules about how coins will change hands in the future."

It also entails a set of conditions on an unspent transaction output (UTXO), which specifies how the relevant coins associated with a transaction can be spent. This definition is commonly found in dictionaries.

For instance, a single wallet has the ability to impose a covenant on the Bitcoin that it possesses by whitelisting a select group of associated addresses.

When one wallet broadcasts a Bitcoin transaction to another wallet, the first wallet can only transmit the same Bitcoin to addresses that are listed on that whitelist.

Bitcoin in a magnifying glass on a machine background
Bitcoin in a magnifying glass on a machine background

Advantages Of Bitcoin Covenants

One of the most important things that developers work on all the time is making Bitcoin safer, and covenants could be a big help in this direction.

Covenants are good for security as well as scalability, especially when protecting against any variation of the $5 wrench attack.

When someone takes steps to protect their Bitcoin assets, making it harder for other people to steal them, this is a great use case.

Disadvantages Of Bitcoin Covenants - Bitcoin Experts And BIP119 Covenant

Adam Back, Jimmy Song, and Andreas Antonopoulos, all of whom are well-known Bitcoin experts, have voiced some concerns about the use of restrictive covenants, especially in the case of BIP119.

In particular, Antonopoulos has expressed concern regarding "recursive covenants" that the new version may impart and which may ultimately lead to the degradation of the network.

When a programmer restricts a transaction but does so in a way that also restricts the transaction that comes after it, he has created a recursive covenant.

This starts a chain reaction that can go on forever, leading to an infinite number of new covenants that repeat themselves.

BIP-119 CTV Bitcoin Covenant

With BIP-119 OP CHECKTEMPLATEVERIFY (CTV), Bitcoin could get a new soft-fork upgrade that would let it be used in a lot of new ways.

Rubin is the author of Bitcoin Improvement Proposal 119 (BIP 119).

These Bitcoin Improvement Proposals (BIPs) are a way for both professional and amateur coders who contribute to Bitcoin to suggest changes to Bitcoin's code for the whole Bitcoin community to think about.

People Also Ask

What Are Bitcoin Covenants?

A covenant is a category of proposed amendments to the rules of Bitcoin's consensus that would enable a script to prevent an approved spender from spending on specific other scripts. This would be possible if an authorized spender was prevented from spending on certain other scripts.

What Are Fungibility Threats Of Bitcoin Covenant?

The fungibility of Bitcoin, or the capacity of each Bitcoin to function and perform the same way as every other Bitcoin, could be compromised by covenants. Covenants would alter the characteristics of particular Bitcoin units, but they would be beneficial for security and scalability.

What Is The Risk Of Using Bitcoin Covenant?

Although restricting the places where Bitcoins can be spent offers the benefit of increased safety, doing so also opens the door to censorship and control by governments, both of which would be detrimental to the continued existence of Bitcoin. Exchanges could be forced by the authorities to withdraw their funds only into agreements that have some degree of control over the coin.

Conclusion

Strong opinions have been expressed on both the benefits and drawbacks of bitcoin covenants; yet, debates are both beneficial and required for the improvement of a decentralized and leaderless network.

In the end, it will be up to the users and the node operators to make the final decision, and they will be the ones to download the software that most accurately represents their perspective.

Have you heard about Terra's spectacular collapse?

About The Authors

Camilo Wood

Camilo Wood - Every day, to make a conscious decision to do something, say something, or act in a way that will improve my work experience. I assist organisations in disrupting the status quo of transition. I teach them how to turn their community from enduring change to evolving through change using a realistic and repeatable structure.

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