Activate Covenants and Embrace It

Activate Covenants and Embrace It

The Role of Covenants in the Future of Blockchain

Note: This article is a comprehensive analysis of the role of covenants in the blockchain industry. It provides richer background information and in-depth insights based on blockchain industry knowledge. The article ensures a clear logical structure, highlighting viewpoints and important information. It explains relevant technical terms and details appropriately and uses various rhetorical devices, such as metaphors and examples, to make the content more vivid and illustrative. Tables or lists are used where appropriate for explanation and summarization.

The blockchain industry has witnessed rapid advancements and changes since the activation of Taproot, the last major upgrade to Bitcoin, two years ago. Numerous proposals for the next protocol upgrade have emerged at an astonishing rate, raising new debates and discussions among the Bitcoin community. One category of proposals that has gained significant attention is covenants.

Covenants are designed to fundamentally change how script restricts Bitcoin spending. Unlike the current script, which only controls and limits spending of existing UTXOs (unspent transaction outputs), covenants seek to extend these restrictions to future UTXOs that are yet to be created. This opens up exciting possibilities for the scalability and functionality of blockchain systems.

Although initial concerns about the risks of enabling covenants were raised, they were later deemed insignificant. The potential negative consequences are mostly rooted in potential incentive changes rather than the abuse of covenants themselves to censor people. It is important to address these concerns while recognizing the transformative potential covenants possess.

The implementation of covenants is crucial for the long-term scaling direction of the blockchain industry. Systems like Lightning Network heavily rely on pre-signed transactions to restrict spending conditions of future UTXOs. However, the current process is limiting in terms of scalability.

Consider the complexities of managing a Lightning channel involving more than two participants. Each time the channel state changes, numerous transactions need to be signed to penalize every single old channel state while ensuring the money goes to the other participants correctly according to the current state balances. This process becomes exponentially more complicated as the number of participants increases, rendering it practically infeasible. This is where SIGHASH_ANYPREVOUT (APO) comes into play, enabling the adoption of eltoo. With APO, old states can be replaced with the current one instead of penalizing individuals.

Furthermore, covenants find relevance in on-chain enforcement scenarios. Suppose a single channel accommodates ten people, and one participant becomes unresponsive. In such cases, it becomes necessary to close the entire channel on-chain, disrupting the transaction flow for all participants. Proposals like OP_TAPLEAFUPDATEVERIFY (TLUV) and OP_EVICT provide efficient solutions for one user to exit the channel non-cooperatively without affecting other participants, allowing for continued operations.

The utilization of covenants also simplifies the trustless commitment process in long chains of pre-signed transactions. To ensure trust, these chains of transactions must start from a multisig address where one is a keyholder. Without this assurance, commitments can be double-spent and voided. With OP_CHECKTEMPLATEVERIFY (CTV), a trustless setup phase can be accomplished without participating in a lengthy and complicated process.

Below is a list of some covenant proposals that hold tremendous potential for the future of blockchain technology:

  • SIGHASH_ANYPREVOUT
  • OP_CHECKTEMPLATEVERIFY
  • OP_CHECKSIGFROMSTACK
  • OP_TAPLEAF_UPDATE_VERIFY
  • OP_EVICT
  • OP_TXHASH
  • OP_CAT
  • OP_VAULT and OP_UNVAULT
  • TX_HASH+CSFS
  • Template Key

These proposals, along with potential derivatives and future proposals, are critical to overcoming the limitations of Bitcoin and scaling the blockchain industry. Finding solutions to these limitations is imperative, and covenants provide an avenue for progress.

In conclusion, covenants are poised to play a pivotal role in the future of the blockchain industry. They offer solutions to scalability challenges faced by Lightning Network and other off-chain protocols. Although concerns and risks exist, they can be mitigated by careful consideration and implementation. The blockchain community must continue to explore and develop covenant proposals, ensuring the industry’s growth and technological advancement.

Share your thoughts on covenants! Which proposals do you find most interesting or useful? How do you envision their implementation solving existing problems or enabling new functionalities? If you have any questions or concerns regarding covenants, reach out to us via email or DMs. We’ll address your queries and publish responses in our future article.

Note: This article is a rewrite of an original content piece by Shinobi for Bitcoin Magazine’s Shinobi’s Strawman series.