Why Bitcoin Smart Contracts Use Covenants

Native Bitcoin Script lacks loops and state, making DeFi primitives like vaults or DEXs impossible. This forced innovation to sidechains or wrapped assets, fragmenting liquidity and security.

• Security Trade-off: Moving to L2s sacrifices Bitcoin's base layer security guarantees.
• Capital Inefficiency: Wrapped BTC (wBTC, tBTC) introduces ~$10B+ in custodial or trust assumptions.

Covenants like OP_CHECKTEMPLATEVERIFY (CTV) enforce spending conditions in advance, enabling non-custodial vaults, payment pools, and decentralized options. Taproot's Merkle trees allow complex logic to be hidden until execution.

• State Channel Scaling: Enables ~1M TPS off-chain with on-chain settlement via penalty transactions.
• Minimal On-Chain Footprint: Complex contract logic commits to a single 32-byte hash, reducing fees.

Projects like BitVM and RGB use covenants to create a verification game or client-side validation model. Computation and state are moved off-chain, with Bitcoin acting as a supreme court for disputes.

• Ethereum Contrast: Unlike EVM's global state, Bitcoin covenants enable localized state and privacy.
• Bridge Security: Enables trust-minimized bridges like tBTC v2 without monolithic multisigs.

Covenant-based design prioritizes user sovereignty and security over the seamless composability found in Ethereum. Contracts are isolated by design, preventing reentrancy attacks but requiring explicit bridging.

• Security First: No "infinite money" bugs; contract boundaries are physically enforced.
• Developer Friction: Building requires a paradigm shift from account-based to UTXO-based thinking.

Native Bitcoin is a bearer asset with no on-chain logic. This makes decentralized finance, non-custodial lending, and complex multi-sig impossible without trusted intermediaries.

• No DeFi Primitives: Can't build Uniswap or Aave.
• Custodial Risk: Requires centralized entities for pooled capital.
• Limited Expressiveness: Simple scripts only validate signatures, not transaction destinations.

CheckTemplateVerify (CTV) and Taproot Leaf Scripts enforce spending conditions on a UTXO's outputs, not just its inputs. This creates enforceable financial agreements on-chain.

• Stateful Contracts: Enables vaults, payment pools, and decentralized options.
• Non-Custodial Pools: Users retain key control while participating in shared liquidity (see Ark, BitVM).
• Deterministic Execution: Contract outcome is known at creation, eliminating miner manipulation.

Covenants enable secure two-way pegs for Bitcoin sidechains like Drivechain (BIPs 300/301). They act as a cryptographic vault, allowing BTC to be programmatically locked and released based on SPV proofs.

• Scalability: Moves computation to a sidechain, preserving Bitcoin L1 security.
• Innovation Sandbox: Enables Ethereum-like smart contracts (RSK, Stacks) without forking Bitcoin.
• Sovereign Recovery: Users can unilaterally withdraw funds even if the sidechain halts.

Bitcoin covenants are not Turing-complete. They verify transaction patterns, not arbitrary computation. This is a security feature, not a bug.

• Predictable Gas: No loops or recursion means fees are fixed and known upfront.
• Reduced Attack Surface: Eliminates reentrancy and unbounded computation bugs plaguing Ethereum.
• Design Philosophy: Optimizes for security and predictability over maximal expressiveness.

Ethereum's general-purpose EVM prioritizes flexibility, while Bitcoin's covenants prioritize security and predictability. This defines their respective builder ecosystems.

• Ethereum: Uniswap, AAVE, Lido. Complex state, higher risk, rapid innovation.
• Bitcoin: Ark, Liquid, RGB. Constrained state, capital efficiency, sovereign verification.
• Trade-off: You get composability or you get finality. Choose one.

Advanced covenant patterns like recursive covenants and BitVM's fraud-proof system enable Turing-complete logic verified on Bitcoin, but executed off-chain.

• BitVM: Enables optimistic rollups, bringing Ethereum L2 scaling patterns to Bitcoin.
• Recursive Enforcement: Allows long-running, stateful contracts (e.g., a perpetual DEX).
• Hybrid Model: Maximizes Bitcoin's security while outsourcing computation, similar to Celestia's data availability layer.

Native Bitcoin Script is intentionally limited, preventing UTXOs from enforcing rules on their future spending. This makes decentralized finance and scalable L2s impossible without trusted intermediaries.\n- No Stateful Logic: A UTXO cannot know its transaction history.\n- No Vaults or DAOs: Cannot enforce timelocks or multi-party governance on funds post-creation.

A proposed opcode that lets a UTXO commit to the exact hash of its next transaction. This creates non-discretionary spending paths, enabling trust-minimized vaults and payment pools.\n- Forced Execution: Funds can only move to a pre-committed script.\n- Foundation for L2s: Enables drivechains and congestion control for rollups like BitVM.

Using Tapscript leaves within a Merkle tree to embed covenant logic in a single on-chain output. ANYPREVOUT (APO) soft fork allows signatures to be reused across transactions, enabling eltoo-style channels and recursive covenants.\n- Privacy-Preserving: Complex logic hidden under a single Taproot key.\n- Efficient L2s: Powers Lightning Network stability and Ark-like silent payments.

Bitcoin covenants are intentionally restrictive to preserve the network's security model. Unlike Ethereum's Turing-complete EVM, they enable specific use cases without opening attack vectors for infinite state growth or miner extractable value (MEV).\n- Security First: Logic is bounded and computationally cheap.\n- Composability Limit: Complex DeFi lego is harder, favoring simplicity and security.

Covenants are the bedrock for Bitcoin's Layer 2 ecosystem. They enable sovereign rollups (via BitVM's challenge-response), sidechain pegs (like Drivechain), and client-side validation protocols (RGB, Taro).\n- Trust-Minimized Bridges: Move BTC to L2s without a federation.\n- Scalable Settlements: Move computation off-chain, settle batches on-chain.

Contrast with Ethereum's global state model, where smart contracts hold balance and logic. Bitcoin's covenant approach shifts complexity to transaction graph validation, avoiding global state bloat but requiring more sophisticated wallet and indexer infrastructure.\n- UTXO vs. Account: Localized vs. global state verification.\n- Developer Mindset: Flow control via transaction chains vs. contract function calls.