A quick guide on Bitcoin deals and their meaning

Outside of computers and blockchain technology, covenants are extensions applied to contracts that dictate specific inclusions, restrictions, or rules that the new owner must adhere to. For example, if a building is sold, an applicable covenant may dictate that the color of the building can never be changed. If the color changes, it may mean a penalty or void the contract.

In a more important context, an applied agreement can also dictate what happens to employees of a company in the event of a takeover from another company. This is used to protect the interests of employees who have been loyal to the company. In the Bitcoin setting, agreements are not a reality yet, but they were part of the controversial Bitcoin Improvement Proposal 119 (BIP 119) presented by developer Jeremy Rubin earlier this year.

The founder(s) of Bitcoin created BIPs to allow the BTC community to peer-review and implement improvements, upgrades and fixes that could help Bitcoin become the world’s currency.

In this article, we discuss what Bitcoin deals are, their pros and cons, and the controversial debate surrounding them.

What are Bitcoin deals?

Bitcoin contracts are proposed extensions to the Bitcoin code that would allow people to keep some control over BTC that is no longer with them. In simpler words, you can add restrictions on Bitcoins that you have transferred to someone else.

Currently, if you transfer an amount of Bitcoin to a wallet, by choice or by mistake, your ownership ends there. There is no way to get it back or dictate what Bitcoin must be spent on or used for.

With the proposed Bitcoin agreements, it will be possible for you to transfer Bitcoin to someone with some attached restrictions in the form of code. You can make it so that the amount of Bitcoin can only be transferred back to your wallet, or that it must only be used after a certain time or whatever rules you can imagine.

You can allow or block certain wallets as well. You can even use a pact to act as escrow to hold a certain amount of BTC for a period of time before it is available for use.

As you can imagine, a drastic upgrade like this can be a matter of great debate. Let’s find out the possible advantages and disadvantages of Bitcoin deals.

Advantages of Bitcoin deals

Currently, the irreversible nature of Bitcoin means that if someone manages to steal your private code and transfers money to their wallet, there is no way to get it back or find out who the wallet belongs to (which will still be the case after contracts).

But with Bitcoin contracts, you have another layer of protection that will limit the use of that amount of bitcoin. Simply put, if someone steals from you, you can choose where they spend their money and even make it so that they can only send BTC back to you and nothing else.

The throughput and scalability that has long been a matter of concern can also be improved with covenants. Multiple transactions can be merged to take up less block space through a pact, this will reduce the time it takes to process transactions and the gas fees as well.

In addition, Bitcoin agreements increase Bitcoin’s utility from mere value transfer to something closer to smart contracts. You can set timelines for payments, have agreements within the payment mechanism, and even plug the transfer of Bitcoin based on fluctuating market prices.

Disadvantages of Bitcoin deals

The biggest downside to Bitcoin deals is the loss of fungibility. This means that not all Bitcoins will be equal after adopting covenants. Bitcoins “untouched” by agreements will have greater value, creating complications when it comes to even a simple transfer of funds.

Covenants can be recursive – meaning the additional covenant can go beyond a transaction and remain tied to the amount after the first transaction. For example, if you add an agreement that says 10 percent of the transfer amount will return to your wallet, regardless of who sent it to you, it will get the full amount back to you within 10 transactions. This leads to further loss of fungibility.

Ultimately, the mass adoption of Bitcoin depends on it being simple enough for ordinary people to understand and use. While some believe that Bitcoin is already quite complicated, covenants will take it to another level. Regardless of industry efforts to bring Bitcoin to the people, pacts will widen the learning curve and may hinder mass adoption.

The ongoing debate

Bitcoin agreements are not a reality yet because it requires a democratic process to implement any Bitcoin improvement proposal. For a controversial proposal like this, there are lobbies on both sides rallying with similar enthusiasm.

Those who want agreements implemented believe that the increased security will stop all thefts and malpractices in the Bitcoin ecosystem and help the scalability of Bitcoin. Those against it believe that it will destroy the big sell-off of Bitcoin as the people’s currency of the future with the loss of functionality.

Since there is no timeline for implementing a Bitcoin improvement proposal, we are sure to see more discussion and debate in the coming months and years about agreements and more drawbacks or use cases uncovered.