When it comes to private property law, covenants are binding contracts that control how an object is used. Take for instance prohibitions on extending a building or changing its facade color: these agreements limit what can be done with the asset even though you own it. Bitcoin also falls under this definition of private property and so terms like ‘covenant’ have been adopted to place restrictions on transactions using cryptocurrencies. With Bitcoin ownership comes limits in use; understanding the boundaries set by covenants allows us to better navigate our involvement in this space.
Comparable to banks, Bitcoin covenant proposals place restrictions on how a purchased coin can be used and where it is allowed to travel. These controls are employed when there is potential for the coins to enter underground or unlawful markets.
Despite their potential to enhance Bitcoin, covenants have not been seriously considered for implementation in the cryptocurrency due to the complexity of execution and clashes regarding its fungibility and censorship resistance.
Covenants are miniscule “building blocks” of language that empower programmers to increase the capabilities of Bitcoin Script. By utilizing covenants, transactions can control and limit the scripts used by redeemers.
When performing a Bitcoin transaction, your digital currency is secured with an impenetrable locking script. To spend the coins, all conditions of this script must be satisfied—such as requiring a signature to verify that you own the corresponding private key or setting timelocks which prohibits coin expenditure until after certain blocks have passed.
While a typical Bitcoin script requires specific conditions to be fulfilled for unlocking certain requirements, such as signing in with a private key, covenants take it one step further by restricting how and where coins can be spent. This provides greater security and control over your cryptocurrency.
A bitcoin covenant is a tool that can be used to help enforce certain rules on the Bitcoin network. While they are not currently widely used, they have the potential to be very helpful in ensuring that only valid transactions are included in blocks and preventing double spending. If you’re interested in learning more about bitcoin or other cryptocurrencies, be sure to check out our blog for more great articles!
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