Bitcoin Developers Debate Ossification Versus Innovation as Covenants Rage On

Bitcoin developers are once again debating ossification versus innovation in the protocol. This debate has waged for years, but is now reaching a fever

Bitcoin developers are once again debating the trade-offs between ossification and innovation in the protocol. This debate has been ongoing for several years, but is now reaching a fever pitch as discussions about covenants rage on.

At issue is whether core developers should proceed with a new soft fork to enable covenants. Several covenant proposals are now in circulation, ranging in scope from narrow to broad.

Covenants would allow bitcoin users to share unspent transaction outputs (UTXOs). Currently, individual users have access to their own UTXO. But as the cost of transacting on the base layer increases over time due to higher transaction fees, it will become more expensive for individuals to afford bitcoin transactions. If multiple people can share a UTXO, they can split the cost of transacting across the group, allowing more users to access the base layer.

One simple application of a covenant would be a payment pool, which allows a group of users to share a UTXO and thereby allocate shares among 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 in a vault where it sits for a fixed amount of time before finally reaching its destination address. Perhaps the most extreme soft-fork proposal at the moment 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 is being made by those who wish to expand Bitcoin into new use cases via new second layers and to revive innovation in the Bitcoin ecosystem, allowing for new use cases to develop that would in turn attract new users and thus new demand for bitcoin. This all sounds great in theory, doesn’t it? And who would ever oppose innovation?

But the truth is more nuanced. Believe it or not, innovation can come at a cost. Bitcoin is on the cusp of attracting trillions of dollars more capital from institutional investors. That capital, more than anything else, is seeking the safest and most sound 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 innovation on the base layer had unforeseen second-order effects.

The last two major upgrades to Bitcoin (SegWit and Taproot) were marketed to help with the development of the Lightning Network (by solving the problem of transaction malleability) and enabling more complex financial transactions on Bitcoin. For better or worse, they did open the door for ordinals and inscriptions, whose primary use was to bring NFTs to Bitcoin. Even the most ardent proponents of Taproot and SegWit would not have predicted ordinals and inscriptions. Sure, this attracted new demand from artists who wished to mint their images on Bitcoin as data, but it proves my point that there are always second-order effects from innovation.

That innovation is fine on second layers or even on altcoins, but the base layer is the foundation of the entire system. It is crucial to keep that foundation strong. This ultimately reflects my own belief that the primary use case of Bitcoin is sound money. The soundness derives from the inability to change 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 the genesis block.

No developer is suggesting changing the supply schedule, but even advocating for soft forks erodes the primary value proposition of Bitcoin: that it is immutable and unchangeable. It’s a slippery slope that isn’t worth taking. As the soft-fork proposals do not directly advance the sound money aspects of Bitcoin, they are not worth the risk.