Covenants

Covenants, in bitcoin, are proposed script capabilities that would let a transaction restrict how the coins it creates may be spent in the future. Standard bitcoin outputs specify only who can spend them; a covenant also constrains where or how. The best-known proposal, OP_CHECKTEMPLATEVERIFY, was specified in BIP 119 in 2020.

Why it matters

The flagship application is the vault: coins locked so that any withdrawal must pass through a delay period during which the rightful owner can reverse a thief's attempt with a recovery key. Covenants could also enable congestion control, letting one on-chain transaction commit to many future payouts, and shared ownership constructions that help bitcoin scale. Because covenants require a soft fork, and because poorly designed ones could theoretically enable coercive restrictions on coins, the proposals have been debated for years without activation, a caution supporters find frustrating and defensible in equal measure.

How it works

OP_CHECKTEMPLATEVERIFY works by committing to a template: the output's script contains a hash of the exact transaction shape allowed to spend it, including its outputs. When a spending transaction appears, nodes hash it and check the match, so the coins can only move along the pre-approved path. This restricted design deliberately avoids recursion, in which covenants impose covenants forever, one of the main concerns raised against more expressive alternatives.