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What Are Bitcoin Covenants And How Does It Work?

A bond between two people that propels them to keep to a certain agreement which restricts their freedom of action can always be referred to as a covenant.

There have been many cases of the covenant between two parties as old as the days of the Israelites and God in the old testament of the Christian Bible. They cherished their covenant with God as he cherished his with them, it was a very iconic symbol of respect and mutual agreement to restrict them from sin and also restrict God from destroying them. 

If both parties involved in a covenant can keep to the agreement of such covenant, there will be no conflict of interest.

In private property law, a covenant is used to restrict the property’s use such that the power one has on such property is limited, even though he owns such property.

Bitcoin, being private property, a covenant restricts a holder’s use of the coin, where it is spent, how it is spent and where it is transferred.

In this article, we would elucidate what Bitcoin covenants are and how it works.

What Is Bitcoin Covenant?

Bitcoin is the first-ever cryptocurrency to exist in the world after it was developed by an anonymous person or group of people with the alias Satoshi Nakamoto in 2010. 

Bitcoin is a completely decentralized cryptocurrency which is not controlled by any government authority and its regulation is completely dependent on market forces. It sold for about $0.0008 when it was launched but hit an all-time high of $68,000 in November 2021. 

Thanks to the blockchain technology on which it is built for the strong security and encryption it provides.

Bitcoin covenants restrict a holder’s usage of Bitcoin and can be very useful in upgrading Bitcoin.

It may sound strange to hear that Bitcoin can be upgraded, given the fungibility and censorship-resistant properties of Bitcoin, but the complexity in implementing Bitcoin Covenants is the reason they have not been included in Bitcoin for long.

Covenants are included in the Bitcoin Improvement Proposals(BIPs) which altogether represent the recommended changes to Bitcoin’s consensus.

Bitcoin covenants restrict a user, even though authorized, from spending on certain other scripts. They interpret how to improve Bitcoin in smart contracts and the information code that is executed when certain conditions are fulfilled.

Bitcoin contracts can safeguard the funds of users against hackers. Few of the many proposed applications for Bitcoin covenants include scaling Bitcoin transaction capacity, trust-minimized loans, congestion control etc.

How Bitcoin Covenants Work

As earlier said, Bitcoin covenants are simply some restrictions on a Bitcoin holder. 

Covenants are the smallest and simplest unit of processing which a programmer can utilize to expand the Bitcoin script language for transactions to restrain the scripts of the redeeming Bitcoins.

In every Bitcoin transaction, the conditions of the locking script which is used to protect your Bitcoin must be met before you can spend the coins.

One example of this locking requirement can be the denial of approving a transaction without a signature which proves possession of the private key that matches the public key. This is also similar to covenants that imply coins can’t be spent until after a certain number of blocks.

While a normal Bitcoin script requires just some specific conditions to be met to unlock a particular requirement(for example, signing a transaction with a private key), a Bitcoin covenant restricts what you can or cannot do with the coin and where and where not to spend the coin.

Merits Of Bitcoin Covenant

Covenants are highly important for the security of Bitcoins, especially against any form of a $5 wrench attack. It ensures full protection of Bitcoin against attackers and is harder for people to steal.

It restricts a user’s unspent transaction output(UTXO) to be moved to a multiple signatory address after 365 days.

It addresses the problem of secure key management, and implementing secure vaults is a solution to the biggest problems of crypto security. 

Vaults are good end-user security that discourages the theft of coins.

A user can adopt a technique which involves the use of pre-signed transactions with key deletion to implement a time-lock on funds. This will limit a hacker’s access to funds despite stealing its security private keys.

In Bitcoin-NG, a Byzantine fault-tolerant blockchain protocol, covenants can also implement a restrictive mechanism to prevent double-spending. 

Demerits Of Bitcoin Covenants

Many prominent crypto experts have expressed their concern about the likely adverse effects of the implementation of recursive covenants.

A recursive covenant happens when a transaction is restricted by a programmer in a way that restricts another transaction which further results in future unending recursive covenants.

A good demerit of Bitcoin Covenant is the exposure to censorship. Even though it’s good to lock up where Bitcoin is spent for security reasons, government control and censorship are bound to happen in this case. This will further impede the growth and existence of Bitcoin and exchanges will be forced to withdraw only to covenants that have some influence over the coin.

Secondly, covenants may contradict the fungibility property of Bitcoin.

Even though they are useful for scalability and security, covenants will create distinctive Bitcoin properties which ideally create different types of digital currency according to what could be spent or where it could be spent.

Conclusion

Bitcoin covenants have proven to improve the security system of the cryptocurrency as well as its scalability. There have been lots of arguments on the pros and cons of Bitcoin covenants but aren’t they what makes the cryptocurrency network fun?

They also offer the necessary inspiration to further improve the cryptoverse.

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