Bitcoin Mining
Bitcoin developers are once again debating ossification versus innovation in the protocol. This debate has waged for years, but is now reaching a fever pitch as discussion about covenants rages on. Up for consideration is whether the core developers should push a new soft fork to allow for covenants. Many covenant proposals are now circulating, ranging from narrow to broad scope.
Covenants allow Bitcoin users to share unspent transaction outputs (UTXOs). Today, individual users have access to their own UTXO. However, as the cost of transacting on the base layer increases over time due to greater transaction fees, it will be more expensive for individuals to afford Bitcoin transactions. If multiple people can share a UTXO, they can split the cost of transacting across this group, allowing more user access to the base layer.
A simple application of a covenant would be a payment pool, which allows a group of users to share a UTXO and thereby allocate shares between each other seamlessly. Another application of covenants would be vaults, which would allow you to claw back Bitcoin after you have sent it, by temporarily placing the Bitcoin into a vault where it sits for a fixed amount of time before finally reaching its destination address. Perhaps the most extreme soft-fork proposal right now is OP_CAT, which is the concatenation operator in Bitcoin script. Satoshi disabled this in the early years of Bitcoin to deliberately restrict the capabilities of Bitcoin scripting. That is on the table as well, which would enable covenants along with all manner of innovations.
The case for covenants comes from those who want to expand Bitcoin into new use cases through new second layers and revive the innovation in the Bitcoin ecosystem, allowing for new use cases to develop that would in turn attract new users and therefore new demand for bitcoin. This all sounds great in theory, and who would ever oppose innovation?
But the truth is more subtle. Innovation can come at a cost, believe it or not. Bitcoin is on the verge of attracting trillions of dollars more capital from institutional investors. That capital, more than anything else, is looking for the safest and most secure digital asset. That capital will do more to drive up long-term bitcoin demand than any innovation that we can foresee in the future. And that capital would be at risk if innovating on the base layer had unforeseen unintended consequences.
The last two major upgrades to Bitcoin (SegWit and Taproot) were marketed to assist with the development of the Lightning Network (by resolving the problem of transaction malleability) and allowing more complex financial transactions on Bitcoin. For good or for ill, they did open the door for ordinals and inscriptions, whose chief use was to bring NFTs to Bitcoin. Even the most ardent advocates of Taproot and SegWit would not have predicted ordinals and inscriptions. Sure, this attracted new demands from artists who wanted to move their images onto Bitcoin as data, but it proves my point that there are always unintended consequences from innovation.
It’s fine for that innovation to take place on second layers or even on altcoins, but the base layer is the foundation of the entire system. It is vital to keep that foundation strong. This ultimately reflects my own belief that the primary purpose of Bitcoin is sound money. The soundness arises from the impossibility of changing the supply schedule. The biggest difference between the Bitcoin blockchain and the Federal Open Market Committee is that the FOMC changes its mind every six weeks, while the Bitcoin schedule has remained the same since its inception.
No developer is suggesting changing the supply schedule, but even advocating for soft forks chips away at the chief value proposition of Bitcoin: that it is immutable and unchangeable. It’s a slippery slope that is not worth risking. As the soft-fork proposals do not directly advance the sound money aspects of Bitcoin, it’s not worth the risk.
