Bitcoin Covenant: Advanced Innovation or Threat to Decentralization? Here are 7 Facts!

Jakarta, Pintu News – Bitcoin (BTC) as an open network continues to evolve through improvement proposals known as BIPs (Bitcoin Improvement Proposals). One such proposal that has sparked heated debate is Bitcoin Covenants – a feature that allows restrictions on how and for what purpose the coins can be used.

Is this a form of innovation or a threat to the principle of decentralization? Here’s the explanation in 7 key points.

1. What is Bitcoin Covenant?

In the world of property, a “covenant” is a legal contract that restricts the use of an asset. In the context of Bitcoin, the term refers to a mechanism to limit how and where coins can be transferred once owned.

Bitcoin covenants are technically scripts that are attached to transactions and define additional restrictions after the coins change hands. This means that in addition to fulfilling general conditions such as private signatures, users must also fulfill additional conditions specified by the covenant.

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2. How Does Bitcoin Covenant Work?

Normally, Bitcoin transactions are locked by a locking script that can be unlocked under certain conditions, such as a digital signature. However, covenants add a new layer: specifying conditions for subsequent transactions, such as limiting the recipient’s wallet.

For example, if you have Bitcoin with a covenant that only allows sending to a specific wallet, then whoever receives that Bitcoin must also send it to the same address. This provides layered control over the UTXO transaction path.

3. This Feature Included in BIP119

One of the main proponents of covenants was Jeremy Rubin, who submitted BIP119. This proposal introduced a new opcode called OP_CHECKTEMPLATEVERIFY (CTV), which allows limited covenant implementation for specific cases.

CTV enables aggregated transactions – a solution to reduce network congestion when transaction volumes are high. With CTV, one large transaction can aggregate multiple payments, saving block space and gas costs.

4. Potential Benefits for Bitcoin Security

Bitcoin covenants have great potential in terms of the security of user funds, especially to prevent theft or physical attacks such as the “$5 wrench attack”. One application is the use of vaults, which are coin storage systems with layered controls such as time-lock and multisig.

With a vault, users can set it so that coins can only be sent to a multisig address after a certain time, or can only be accessed through signed and locked transactions. This can be very useful for more secure key management.

5. Can be used for Trustless Lending Schemes

Bitcoin covenants can also be used in trust-minimized lending schemes, where assets can be secured and used in transactions without the involvement of third parties. This mechanism promises the development of simple smart contracts on Bitcoin without major consensus changes.

Some researchers also note that covenants can help control network congestion, prevent double spending attacks, and improve Bitcoin’s throughput efficiency through methods like Bitcoin-NG.

6. Risk of Censorship and Loss of Fungibility

However, not all parties agree. Prominent Bitcoin figures such as Andreas Antonopoulos and Adam Back rejected the covenant due to the potential threat to Bitcoin’s fungibility – the ability of one BTC to be exchanged for another without any difference in value or function.

Antonopoulos highlights the risk of recursive covenants, where a single covenant can create an endless chain of transaction restrictions. In addition, covenants can also be used for censorship by governments, for example forcing exchanges to only transfer BTC to whitelisted addresses.

7. The Final Decision is in the Hands of the Community

Since Bitcoin is a leaderless network, the decision to implement features like covenants rests with users and node operators. They will only run software that reflects their preference for the feature.

Open debates and in-depth evaluations like this are an important part of the decentralization process. Despite the controversy, the covenant remains proof that Bitcoin continues to evolve and experiment with new features to adapt to the challenges of the times.

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Reference:

• Emi Lacapra / Cointelegraph. What are Bitcoin covenants, and how do they work?