A Quick Guide On Bitcoin Covenants And Their Importance


Outside of computers and blockchain technology, covenants are extensions applied to contracts that dictate specific inclusions, restrictions, or rules that the new owner must adhere to. For example, if a building is sold, an enforced convention might dictate that the color of the building can never be changed. If the color is changed, it could mean a penalty or expiration of the contract.

In a more important context, an applied agreement could also dictate what happens to the employees of one company upon the acquisition of another company. This is used to protect the interests of employees who have been loyal to the company. In the Bitcoin environment, the conventions are not yet a reality, but they were part of the controversial Bitcoin Improvement Proposal 119 (BIP 119) that developer Jeremy Rubin introduced earlier this year.

The founders of Bitcoin created BIP to empower the BTC community to conduct peer reviews and implement improvements, updates, and fixes that could help Bitcoin become the currency of the world.

In this article, we discuss what Bitcoin conventions are, their pros and cons, and the controversial debate surrounding them.

What are Bitcoin covenants?

Bitcoin covenants are proposed extensions to the Bitcoin code that would allow people some control over BTC that they no longer have. In simpler words, you can add restrictions to the Bitcoins you have transferred to someone else.

Currently, if you transfer any amount of Bitcoin to any wallet, by choice or mistake, your ownership ends there. There is no way to get it back or dictate what the Bitcoin should be spent or used for.

With the proposed Bitcoin conventions, it would be possible to transfer Bitcoin to someone with some restrictions attached in code form. You can make the amount of Bitcoin can only be transferred to your wallet or have to be spent only after a certain amount of time or any rules you can think of.

You can also allow or block certain wallets. You can even use an escrow agreement to hold a certain amount of BTC for a period of time before it becomes available for use.

As you can imagine, a drastic update like this can be a topic of great debate. Let’s find out the possible advantages and disadvantages of Bitcoin conventions.

Advantages of Bitcoin Conventions

Currently, the irreversible nature of Bitcoin means that if someone manages to steal your private code and transfer funds to your wallet, there is no way to get it back or find out who the wallet belongs to (which would still be the case after the covenants).

However, with the Bitcoin conventions, you have another layer of protection that would restrict the use of that amount of bitcoin. In a nutshell, if someone steals from you, you can choose where they spend their money and even have them return only the BTC and nothing else.

Performance and scalability that have long been a concern can also be improved with conventions. Multiple transactions can be bundled together to take up less space in the block through an agreement, which will reduce the time needed to process transactions and also gas fees.

Additionally, Bitcoin conventions increase the utility of Bitcoin from a simple transfer of value to something closer to smart contracts. You can set deadlines for payments, have agreements within the payment mechanism, and even connect Bitcoin transfer based on fluctuating market prices.

Disadvantages of Bitcoin Conventions

The main disadvantage of Bitcoin conventions is the loss of fungibility. This means that not all Bitcoins will be the same after adopting conventions. The “untouched” bitcoins by convention will have a higher value, creating complications when it comes to even a simple transfer of funds.

Agreements can be recursive, meaning that the aggregate agreement could go beyond one transaction and remain tied to the amount after the initial transaction. If, for example, you add a convention that dictates that 10 percent of the transfer amount is returned to your wallet, regardless of who sent it to you, the full amount in question over 10 transactions will be returned to you. This leads to a further loss of fungibility.

Ultimately, the mass adoption of Bitcoin depends on it being simple enough for ordinary people to understand and use. While some think that Bitcoin is complicated enough already, conventions will take it to another level. Regardless of the efforts made by the industry to bring Bitcoin to the people, the conventions will extend the learning curve and could hinder mass adoption.

The ongoing debate

Bitcoin conventions are not yet a reality because a democratic process is needed to implement any proposal to improve Bitcoin. For a controversial proposal like this, there are lobbyists on both sides who are coming together with similar enthusiasm.

Those who want conventions to be implemented think that increased security will stop all theft and malpractice in the Bitcoin ecosystem and help Bitcoin scalability. Those who are against believe that it would destroy the great sale of Bitcoin as the popular currency of the future with the loss of its fungibility.

As there is no timeline for implementing a proposal to improve Bitcoin, we are sure to see more discussion and debate in the coming months and years about trade-offs and more drawbacks or discovered use cases.