Covenants Change Bitcoin Smart Contract Design

BitVM uses a fraud-proof system and covenants to enable complex, off-chain logic with on-chain Bitcoin settlement. It's a paradigm shift, not a sidechain.

• Enables trust-minimized bridges, rollups, and games without changing consensus.
• Key Mechanism: A challenge-response protocol where a single honest participant can punish fraud.
• Trade-off: Requires significant off-chain coordination and capital lock-up for operators.

Federated sidechains like Liquid use a simple, powerful covenant: "Only a defined federation can move these coins." This enables rapid, confidential asset issuance.

• Ships Today: $100M+ in assets (L-BTC, USDT, securities) with ~2 minute finality.
• Use Case: Exchanges use it for fast, high-volume BTC transfers and tokenized securities.
• Limitation: Security relies on the federation, a trade-off for functionality and speed.

Projects like RGB and Taro use covenants to bind Bitcoin UTXOs to off-chain state, creating scalable, private smart contracts and assets.

• Architecture: The Bitcoin ledger only records commitments; all complex state is managed off-chain.
• Benefit: Enables ~10k TPS equivalent for asset transfers with strong privacy.
• Challenge: Requires sophisticated client-side software and data availability solutions.

DLCs use oracles (like Bitcoin Oracle or Lava) to create non-custodial, event-driven contracts. The covenant enforces: "Funds move only if oracle attests X."

• Primary Use: Decentralized derivatives, prediction markets, and insurance.
• Advantage: Minimizes on-chain footprint; only oracle signatures are broadcast on settlement.
• Risk: Security collapses to the honesty of the oracle attestation committee.

While not live, OP_CAT revival and Simplicity represent the next evolution, enabling more expressive and analyzable covenants directly in Script.

• OP_CAT: Would enable recursive covenants and BitVM-like constructs natively, unlocking Merkleized Abstract Syntax Trees (MAST) fully.
• Simplicity: A more robust, formally verifiable alternative to Bitcoin Script, designed for safe covenant creation.
• Impact: Would dramatically reduce the engineering complexity of current covenant hacks.

A proposed layer-2 where miners vote to move BTC to/from sidechains. The covenant is: "BTC can be moved back to L1 only with miner approval."

• Vision: A marketplace of experimental sidechains (for DeFi, privacy) without fracturing Bitcoin's liquidity.
• Controversy: Introduces a new, miner-based trust assumption for cross-chain transfers.
• Status: BIP-300 proposal; requires a soft fork and significant miner adoption.

Native Bitcoin Script is limited. It can verify signatures and timelocks, but cannot enforce what happens to funds after they are spent. This cripples complex DeFi primitives like vaults, DEXs, and non-custodial lending.

• No Stateful Logic: Script is stateless; cannot enforce future conditions on UTXOs.
• Custody Trade-off: Complex logic requires trusted, off-chain watchtowers or federations.
• Capital Inefficiency: Funds are either fully locked or fully free, with no programmable intermediate states.

Covenants like CheckTemplateVerify (CTV) and OP_CAT allow a transaction to restrict how its output UTXOs can be spent. This creates recursive, stateful contract logic on-chain.

• CTV: Locks funds to a specific future transaction graph. Enables vaults with withdrawal limits and non-interactive channel factories.
• OP_CAT: Enables generalized covenant constructions, potentially rivaling Ethereum's smart contract flexibility for specific use cases.
• Recursive Enforcement: The constraint travels with the UTXO, enabling multi-step, trust-minimized protocols.

Covenants provide the foundational layer-1 primitive for secure, Bitcoin-backed L2s like rollups and state channels, moving beyond federated bridges.

• Drivechain / Sidechain Security: Enables 1-way peg models with Bitcoin-native cryptographic security, reducing reliance on federations.
• Rollup Settlement: Covenants can enforce correct state transitions and fraud proofs directly on Bitcoin, akin to Optimism's fault proofs on Ethereum.
• Liquidity Efficiency: Enables native Bitcoin DEXs (like Uniswap pools) where L1 Bitcoin enforces pool logic, eliminating bridge risk.

Covenants increase Bitcoin's systemic complexity and introduce new attack vectors, challenging its core design philosophy of minimalism and security.

• Script Bloat: Complex covenant scripts increase block weight and validation cost.
• Novel Vulnerabilities: Recursive logic can create unexpected denial-of-service or fund-locking conditions.
• Monetary Policy Risk: Overly complex L1 could undermine Bitcoin's primary value proposition as sound money, diverting focus from settlement to computation.