When a Bitcoin transaction is initiated, the user can specify a covenant that dictates the conditions for spending the involved bitcoin. These conditions can range from simple timelocks to complex multi-signature requirements. Once the covenant is deployed, the bitcoin becomes subject to these predetermined rules, ensuring that it is spent according to the specified conditions.
Bitcoin covenants allow for a diverse range of applications.
Vaults, for example, incorporate a time-lock mechanism, preventing unauthorized spending for a predetermined period, and enhancing security by deterring immediate theft of funds in case of compromised private keys.
Payment channels are another example of covenants. They could facilitate efficient and faster off-chain transactions by enabling intermediaries to process transactions without requiring on-chain confirmations, reducing transaction fees, and improving scalability.