What are bitcoin covenants? (Explained)
Bitcoin (BTC) is a digital currency designed primarily to function as money as well as a form of payment enabled by a variety of smart contracts featured in a fully decentralized manner. In addition, part of its power can be derived from the way it typically uses a flexible script language to specify the redemption criteria. However, it is ensured by the system that whenever the embedded value is unlocked, subsequent transactions must meet the redemption criteria. Whereas if we talk about traditional finance, those contracts rely only on trust and consider enforcement only after the fact, while BTC’s scripting mechanism enforces contracts within the currency system itself. Because the year has only just begun, you still have time to choose your investing strategies for 2023. However, you could have to choose between trading in gold and bitcoin.
With this current system in place, there remains insecurity about how the BTC system is being used by hackers. This is one of the reasons why developers in the crypto sphere are considering creating proposals about covenants for BTC. Covenants are meant to make BTC safer, more scalable, and more efficient. Let’s find out through this blog how exactly they can work, and what is the big problem they are trying to solve.
What is a bitcoin covenant?
Simply put, BTC covenants are treated in the same way as covenants in the physical world. They are a type of script program that usually places restrictions on how money can be spent by the user. On the other hand, another way of understanding the BTC covenants has emerged in the form of a series of proposed changes to the consensus rules. It may be a good choice to ban any transaction of BTC, as BTC is also in the realm of private property.
How Do Bitcoin Contracts Work
A BTC covenant may sound a bit different from other restrictions imposed through the BTC script language. The BTC holder needs to complete the BTC transfer but first, they have to meet specific conditions as well as cross the limits. For example, the user may be required to provide a signature to enable him or her to easily verify that the private key matches the public key of their wallet. Otherwise, they will never be able to transfer funds.
On the other hand, another limitation is the timelock, through which it can be specified that coins cannot be spent until after a certain number of blocks. Such terms appear as a part of the locking script protecting the BTC network. Furthermore, contracts may be able to take these restrictions to the next level by specifying what users can do with their coins or where they can spend them. If you are also a BTC holder, you can put a covenant on your wallet by limiting the whitelisted addresses where BTC can be spent. However, if the account is ever breached by a hacker, they can only send money to them.
Advantages and Disadvantages of Bitcoin Covenants
The developer is constantly striving to improve the security and scalability of BTC, and contracts can be used to help accomplish this goal. Contracts can help improve scalability as well as improve security, especially those against the $5 wrench attack. These are $5 wrench attacks, which usually target individuals who are found to have large amounts of cryptocurrency by either extorting them to hand over their private keys or physically assaulting them. Scribe is used by Bitcoin, Ethereum (ETH) uses Solidity, and Rust is used by Solana. Of these, the blockchain by Solana directly competes with ETH. And like Solana, if we talk about NEAR, it is also trying to compete with ETH with the hope of overcoming some of the shortcomings of ETH.