What are Bitcoin Covenants?

Are a proposed method for adding additional constraints to the ways Bitcoin can be spent, beyond the standard conditions imposed by Bitcoin's scripting language. Covenants can specify not only who can spend the bitcoins but also how they can be spent in the future. For instance, a covenant might ensure that bitcoins can only be sent to certain addresses or be used in specific types of transactions.

Let's consider an example:

Alice wants to create a secure vault for her bitcoins. She creates a transaction that locks her bitcoins in an output that can only be spent according to a predefined template. This template, enforced by CTV, might specify that the bitcoins can only be spent to another vault address or after a certain time delay. If a thief tries to steal Alice's bitcoins, they are constrained by the covenant. The bitcoins can only be spent in accordance with the template. The thief cannot simply move the bitcoins to an arbitrary address but must follow the rules Alice has set.

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