Bitcoin Covenants Explained – What Are They And How Do They Work?


Today’s post is all about bitcoin covenants, the most recent proposal to upgrade the Bitcoin Network.

bitcoin covenants

Although Bitcoin is the first and most-valued cryptocurrency, it is not without limitations.

Gladly, developers have been seeking ways to improve the network and they have now come up with covenants.

Covenants help to improve the security and scalability of the bitcoin network.

Keep reading to find out how it works.


Post Summary

  1. What Are Bitcoin Covenants?
  2. How Do Bitcoin Covenants Work?
  3. Pros And Cons Of Bitcoin Covenants
  4. Conclusion

Click on any item above to read its details immediately.


1. What Are Bitcoin Covenants?

What Are Bitcoin Covenants?

Bitcoin covenants are proposals that restrict how a purchased coin can be spent and where it can be transferred to.

It helps programmers set the conditions for transferring the bitcoin in a particular wallet.

That is, they can determine which addresses may or may not use that bitcoin even if they have access.

Sounds a bit like smart contracts, right? LOL

Usually, bitcoin transactions are programmed to be processed after certain conditions are met like “6 block confirmations.”

But covenants take it a bit further; such that set conditions must be met after the transaction has been processed before the bitcoin can be transferred elsewhere. 

Thus, external addresses can be blocked from using the bitcoin in a given wallet.

The goal is to restrict wallets that are suspected of malicious actions.

Interesting, huh?

Join me in the next section to see how Bitcoin covenants work.


2. How Do Bitcoin Covenants Work?

Technically speaking, Covenants allow a Bitcoin script language to prevent an authorized spender from spending on specific other scripts.

The simplest way to understand how bitcoin covenants work is to think of it as a tool of restriction.

When a bitcoin transaction is completed, coins are received into a wallet, right?

Now, this wallet can place a covenant on the coins it has received.

Or in simpler terms, place a restriction on the coins.

It achieves this by creating a whitelist of addresses that the coins can be transferred to.

Also, it can choose to develop a blacklist of addresses that should never receive the coin.

Note, however, that covenants are written into the bitcoin script backing the transaction.

Bitcoin Script is a simple programming language that provides instructions on how coins are spent (like Ethereum smart contracts).

Moving on, let’s look at the pros and cons of this innovation.

Keep reading!


3. Pros And Cons Of Bitcoin Covenants

As it is with every blockchain innovation, bitcoin covenants have both good and bad sides 👇

Pros

a. Covenants make it difficult for hackers to steal your coins.

It’s so effective that an attacker cannot gain full control of funds even if he has the private keys to a wallet.

Plus, the restriction provided by covenants can help stop double-spending attacks in the bitcoin network.

Double-spending is the risk of using a cryptocurrency twice or more. A double-spending attack in the bitcoin network means that someone has initiated an alteration that will enable them reclaim spent bitcoin. Oops!

b. They prevent Unspent Transaction Output (UTXO) from being sent to a multisig address after a while.

UTXO refers to an output of a bitcoin transaction that has not been used as an input in a new transaction. Think of it as your leftover change after purchasing an item. Learn more here.

Normally, when you have tiny amounts of bitcoin left from your transactions (e.g. 0.00000001BTC), they are automatically sent to another authorized wallet after a given period, say 1 year.

But with Covenants, your bitcoin remains yours, tiny leftover or not.

c. Covenants improve scalability because they allow bitcoin transactions to take different directions with or without the UTXO from the initial action.

With covenants, there is no need to wait for one transaction to be completed before another one is initiated as it is now.

Additionally, they allow for many transactions to be compressed into a single transaction and then expanded again when the mempool is less congested.

Thus, reducing congestion in the network and inadvertently reducing high fees. Cool!

The mempool is where all the valid transactions wait to be confirmed by the Bitcoin network. A high mempool size indicates more network traffic which will result in longer average confirmation time and higher priority fees.

https://www.blockchain.com/charts/mempool-size

Cons

a. Covenants promote restrictions that will be bad for the network if it becomes recurrent.

This means that a restricted transaction results in the restriction of other transactions after it. Ouch!

b. Also, covenants may affect the properties of specific Bitcoin units in an attempt to make them distinct according to the wallets they can be sent.

Hence, disrupting bitcoin’s fungibility. And that’s not part of the plan!


Heads up!!!

If you want to learn how to trade cryptocurrencies profitably, enroll in our Cryptocurrency Mastery Course by going to www.ctmastery.com.
You can also join our Telegram community at https://t.me/ctmastery for more information.


4. Conclusion

Bitcoin Covenants were designed to help improve the scalability and security of the bitcoin network.

However, they are pretty complex and spur concerns over the coin’s fungibility and decentralization.

Little wonder why they are yet to be included in Bitcoin.

That’s all I have for you in this post, I hope that you enjoyed the read.

Please share your thoughts on bitcoin covenants in the comments section below.

Also, hit those social media icons to send this post to friends. Thank you!


Don’t miss…



Source link

Leave a Reply

Your email address will not be published.

Join Our Premium Crypto Telegram Channel And Receive Signals For FREE! We Will Give Signals On Coins To Buy And Make Over $10,000 Profit Under 2 Weeks! You Will Also Gain Access To Premium Airdrops For FREE!

X