Bitcoin's Scaling Woes and the Promise of Covenants

Bitcoin's Scaling Woes and the Promise of Covenants

Apr 05 Tech Standard

Bitcoin, the revolutionary digital currency, was designed to be accessible to anyone with an internet connection. However, as its popularity grows, transaction fees on the base layer are rising, potentially shutting out some users. To address this challenge, many believe Bitcoin needs an update.

Enter covenants, a proposed addition to Bitcoin's code that could significantly improve scalability and functionality. Covenants allow for more control over how Bitcoins (UTXOs) are spent. Imagine a lock on your Bitcoin, where you set specific conditions for spending it, like a timelock or requiring multiple signatures. Covenants enforce these conditions through consensus, making them more secure than pre-signed transactions.

This technology has the potential to be a game-changer. With covenants, more users can hold their Bitcoin on the base layer, while Layer 2 solutions like the Lightning Network become even more powerful. Essentially, covenants compress ownership, not just transactions, allowing for more efficient use of the network.

However, there are different types of covenants, each with its own advantages and potential risks. CTV (CheckTemplateVerify) is a simple yet powerful option. It lets you commit to a future transaction's hash, ensuring only that specific transaction can spend the UTXO. This opens doors for creating numerous Lightning channels from a single UTXO.

TapleafUpdateVerify (TLUV) tackles a different challenge: shared UTXOs. It allows safe and efficient exiting from a shared UTXO, ensuring everyone involved gets their fair share without complex on-chain transactions. However, TLUV's flexibility carries potential risks. It could enable features like drivechains, which some see as detrimental to Bitcoin's long-term security.

While discussions around Bitcoin scaling can get heated, the emergence of covenants offers a promising path forward. It's a complex topic, but with more open and productive conversations, the Bitcoin community can leverage covenants to unlock Bitcoin's true potential.


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