Subject: Re: [bitcoindev] BIP Booby Trapped Wallets - Covenant-Only Taproot Outputs

From: Matias Monteagudo <[email-masked]>
Date: Thu, 11 Sep 2025 11:47:42 +0200

Hi,

I am not sure I presented my BIP the right way. I followed your guide but I
am not getting any feedback and I am not sure if it is visible or I did
something wrong I am not aware of.

Thanks!

M.

On Thu, 21 Aug 2025, 20:16 Matias Monteagudo, <[email-masked]>
wrote:

> <pre>
>   BIP: ?
>   Layer: Consensus (soft fork)
>   Title: Booby Trapped Wallets
>   Author: Matias Monteagudo <[email-masked]>
>   Comments-Summary: No comments yet.
>   Comments-URI: https://github.com/bitcoin/bips/wiki/Comments:BIP-XXXX
>   Status: Draft
>   Type: Standards Track
>   Created: 2025-08-21
>   License: BSD-2-Clause
>   Requires: 341, 342
> </pre>
>
> == Abstract ==
>
> This BIP proposes covenant-only Taproot outputs, an optional but
> irrevocable wallet-level security mechanism. When activated by wallet
> owners, covenant-only mode disables key-path spending and mandates
> script-path spending, creating invisible transaction restrictions that only
> become apparent when violated. This mechanism provides an optional security
> layer for high-value institutional Bitcoin holdings against unauthorized
> access while maintaining transaction privacy until restrictions are
> triggered.
>
> == Copyright ==
>
> This BIP is licensed under the BSD 2-clause license.
>
> == Motivation ==
>
> High-profile Bitcoin holders, particularly institutional entities such as
> exchanges, face significant security risks. When attackers gain access to
> private keys, they can drain wallets with varying degrees of difficulty but
> ultimately succeed. Current security measures are visible and can be
> circumvented by sophisticated attackers.
>
> This proposal creates an optional but irrevocable security mechanism where:
>
> # Wallet owners can voluntarily and irrevocably restrict future
> transactions to predefined destination addresses
> # Once activated, unauthorized transfer attempts are automatically
> redirected to arbitration wallets
> # The restrictions remain completely invisible until triggered
> # Protected wallets appear identical to unprotected ones, preventing
> attacker preparation
> # The mechanism is entirely opt-in and cannot be forced upon any wallet
>
> == Specification ==
>
> === Covenant-Only Taproot Output ===
>
> A covenant-only Taproot output extends standard Taproot (BIP 341) by
> mandating script-path spending through the use of an invalidated internal
> key:
>
> <pre>
> scriptPubKey: OP_1 <32-byte-covenant-taproot-output>
> </pre>
>
> The output commitment follows standard Taproot construction:
> <pre>
> covenant_taproot_output = internal_pubkey + tagged_hash("TapTweak",
> internal_pubkey || merkle_root)
> </pre>
>
> Where internal_pubkey is set to an unspendable value, making key-path
> spending impossible.
>
> === Key Components ===
>
> ==== 1. Internal Key Invalidation ====
>
> The internal public key MUST be set to the following unspendable point:
> <pre>
> internal_pubkey = lift_x(tagged_hash("CovenantOnly/InvalidKey", b""))
> </pre>
>
> This point has no known discrete logarithm, ensuring key-path spending is
> cryptographically impossible while maintaining compatibility with existing
> Taproot validation rules.
>
> ==== 2. Covenant Script Template ====
>
> The covenant script enforces destination restrictions through conditional
> execution:
>
> <pre>
> # Check if destination is whitelisted
> OP_DUP OP_HASH160 <destination_hash> OP_EQUAL
> OP_IF
>     # Validate whitelist membership with Merkle proof
>     OP_SWAP <whitelist_merkle_root> OP_CHECKTEMPLATEVERIFY
>     <destination_pubkey> OP_CHECKSIG
> OP_ELSE
>     # Enforce arbitration for unauthorized destinations
>     <arbitration_wallet_script>
> OP_ENDIF
> </pre>
>
> Note: This script assumes a hypothetical OP_CHECKTEMPLATEVERIFY opcode for
> Merkle proof validation. Actual implementation would use existing opcodes
> for Merkle tree verification. The arbitration_wallet_script can be any
> valid script (single-sig, multisig, or other) as determined by the
> institution and arbitrator.
>
> ==== 3. Whitelist Construction ====
>
> Allowed destinations are hashed into a Merkle tree:
> <pre>
> whitelist_hash = merkle_root(destination_1, destination_2, ...,
> destination_n)
> </pre>
>
> === Transaction Validation ===
>
> ==== Normal Operation ====
>
> When spending to a whitelisted destination:
> # Transaction appears as standard Taproot spend
> # Script-path reveals the covenant logic
> # Whitelist proof validates the destination
> # Transaction proceeds normally
>
> ==== Unauthorized Attempt ====
>
> When attempting to spend to non-whitelisted destination:
> # Script-path execution fails whitelist check
> # Automatic fallback to arbitration wallet
> # Funds are locked pending arbitration resolution
>
> === Activation and Deployment ===
>
> This soft fork follows the deployment mechanism specified in BIP 9
> (Version bits with timeout and delay):
>
> <pre>
> name: covenant-taproot
> bit: TBD (to be assigned by BIP editors)
> starttime: TBD (6 months after BIP Final status)
> timeout: TBD (2 years after starttime)
> threshold: 1815 (90% of 2016 blocks)
> </pre>
>
> The soft fork activates when 90% of blocks in a difficulty period signal
> readiness, ensuring broad miner consensus before enforcement begins.
>
> === New Consensus Rules ===
>
> After activation, nodes MUST enforce the following rules for covenant-only
> Taproot outputs:
>
> # '''Internal Key Validation''': Outputs using the covenant-only internal
> key (as defined in section 1) MUST be validated as covenant-only outputs
> # '''Mandatory Script-Path''': Covenant-only outputs MUST be spent using
> script-path spending; key-path spending attempts are INVALID
> # '''Script Execution''': The covenant script MUST successfully execute
> and validate destination restrictions
> # '''Merkle Proof Verification''': Whitelisted destinations MUST provide
> valid Merkle inclusion proofs
> # '''Arbitration Fallback''': Non-whitelisted destinations MUST redirect
> to the specified arbitration wallet
>
> These rules only apply to outputs created after activation and do not
> affect existing Taproot outputs.
>
> == Backwards Compatibility ==
>
> This proposal maintains full backwards compatibility through careful soft
> fork design:
>
> # '''Pre-existing Outputs''': All existing Taproot outputs continue to
> function unchanged with their original semantics
> # '''Node Compatibility''': Non-upgraded nodes validate covenant-only
> outputs as standard Taproot without additional restrictions
> # '''Wallet Compatibility''': Existing wallet software continues to work;
> covenant functionality is purely additive
> # '''Transaction Relay''': All transactions remain compatible with
> existing relay policies and fee estimation
> # '''Mining Compatibility''': No changes required to mining software or
> pool configurations
>
> The soft fork nature ensures that old software never sees invalid
> transactions, maintaining network cohesion during the upgrade period.
>
> == Rationale ==
>
> === Why Extend Taproot? ===
>
> Taproot provides the perfect foundation because:
>
> # '''Privacy''': Scripts remain hidden until execution
> # '''Flexibility''': Merkle tree structure supports complex covenants
> # '''Efficiency''': Minimal on-chain footprint
> # '''Adoption''': Building on existing, activated technology
>
> === Why Disable Key-Path Spending? ===
>
> Key-path spending would allow attackers to bypass covenant restrictions
> entirely. By making the internal key unspendable, we ensure that all
> spending must go through the covenant script validation.
>
> === Arbitration Mechanism ===
>
> The automatic arbitration fallback provides:
>
> # '''Recovery path''': Legitimate users can recover funds through
> arbitration
> # '''Deterrent effect''': Attackers know stolen funds will be locked
> # '''Institutional security''': Professional arbitration services can be
> integrated with any wallet type
>
> Institutions can choose from existing specialized services such as the
> Blockchain Arbitration & Commerce Society (https://bacsociety.com) or any
> other arbitrator they trust, providing flexibility in arbitration provider
> selection.
>
> === Privacy Benefits ===
>
> # Protected wallets are indistinguishable from regular Taproot addresses
> # Covenant restrictions only become visible when violated
> # Normal operations remain completely private
> # Attackers cannot identify targets in advance
>
> == Reference Implementation ==
>
> === Core Validation Logic ===
>
> <pre>
> def validate_covenant_taproot(scriptPubKey, witness_stack, tx_outputs):
>     """Validate a Covenant-Only Taproot spend"""
>
>     # Extract the covenant output
>     if len(scriptPubKey) != 34 or scriptPubKey[0] != 0x51:
>         return False
>
>     covenant_output = scriptPubKey[2:]
>
>     # Verify script-path spending (key-path is invalid)
>     if len(witness_stack) < 3:
>         return False
>
>     script = witness_stack[-2]
>     control_block = witness_stack[-1]
>
>     # Validate Taproot script-path
>     if not validate_taproot_script_path(script, control_block,
> covenant_output):
>         return False
>
>     # Execute covenant script
>     return execute_covenant_script(script, witness_stack[:-2], tx_outputs)
>
> def execute_covenant_script(script, witness_stack, tx_outputs):
>     """Execute the covenant validation script"""
>
>     # Parse script to extract whitelist and arbitration keys
>     whitelist_hash, destination_key, arbitration_keys =
> parse_covenant_script(script)
>
>     # Check if spending to whitelisted destination
>     for output in tx_outputs:
>         dest_hash = hash160(output.scriptPubKey)
>         if validate_whitelist_inclusion(dest_hash, whitelist_hash,
> witness_stack):
>             # Spending to authorized destination
>             return validate_signature(destination_key, witness_stack)
>
>     # No whitelisted destination found - enforce arbitration
>     return validate_arbitration_wallet(arbitration_keys, witness_stack)
> </pre>
>
> === Wallet Integration ===
>
> <pre>
> class CovenantWallet:
>     def create_covenant_output(self, whitelist_destinations,
> arbitrator_pubkey):
>         """Create a new Covenant-Only Taproot output"""
>
>         # Create whitelist Merkle tree
>         whitelist_hash =
> self.build_whitelist_merkle_tree(whitelist_destinations)
>
>         # Build covenant script
>         covenant_script = self.build_covenant_script(
>             whitelist_hash,
>             self.institution_pubkey,
>             arbitrator_pubkey
>         )
>
>         # Create Taproot commitment with invalid internal key
>         invalid_internal_key = tagged_hash("CovenantOnly/InvalidKey", b"")
>         taproot_output = self.compute_taproot_output(invalid_internal_key,
> covenant_script)
>
>         return taproot_output
>
>     def spend_covenant_output(self, utxo, destination, whitelist_proof):
>         """Spend from a covenant-protected output"""
>
>         # Build witness stack
>         witness_stack = []
>         witness_stack.extend(self.create_signature_data())
>         witness_stack.append(whitelist_proof)
>         witness_stack.append(self.covenant_script)
>         witness_stack.append(self.control_block)
>
>         return self.create_transaction(utxo, destination, witness_stack)
> </pre>
>
> == Security Considerations ==
>
> === Cryptographic Security ===
>
> # '''Internal Key Security''': The covenant-only internal key is derived
> using a cryptographically secure hash function with no known preimage,
> ensuring no party can compute the corresponding private key
> # '''Script Hiding''': Covenant logic remains hidden until first
> execution, preventing attackers from analyzing restrictions beforehand
> # '''Merkle Tree Security''': Whitelist validation relies on
> cryptographically secure Merkle tree inclusion proofs, preventing
> unauthorized destination forgery
>
> === Attack Vectors and Mitigations ===
>
> # '''Private Key Compromise''': Primary threat mitigated by mandatory
> script-path spending that enforces covenant restrictions regardless of key
> compromise
> # '''Script Analysis Attack''': Covenant structure only revealed upon
> violation attempt, limiting attacker intelligence gathering
> # '''Arbitration Compromise''': Mitigated by using secure arbitration
> wallet configurations and the ability to use multiple independent
> arbitrators
> # '''Implementation Vulnerabilities''': Reference implementation includes
> comprehensive test vectors and edge case handling
> # '''Social Engineering''': Attacks against arbitrators are mitigated
> because the arbitrator's identity remains hidden until the covenant is
> triggered, preventing targeted attacks during normal operations
>
> === Economic Security Model ===
>
> # '''Attacker Economics''': Theft attempts face high probability of fund
> seizure through arbitration, making attacks economically irrational
> # '''Arbitrator Incentives''': Arbitrators have economic stake in fair
> resolution to maintain reputation and future business
> # '''Institution Benefits''': Legitimate institutions maintain full
> operational control while gaining protection against unauthorized access
> # '''Network Effects''': Widespread adoption increases overall ecosystem
> security without degrading privacy or performance
>
> === Privacy Trade-offs ===
>
> # Normal operations maintain full privacy
> # Violation attempts reveal covenant structure
> # Overall privacy significantly better than current multisig alternatives
>
> == Test Vectors ==
>
> === Vector 1: Covenant-Only Output Creation ===
>
> <pre>
> Internal Key:
> 50929b74c1a04954b78b4b6035e97a5e078a5a0f28ec96d547bfee9ace803ac0
> Merkle Root:
> 9a1c7d8f0e5b3a4c2d9f8e7b6a5c4d3e2f1a0b9c8d7e6f5a4b3c2d1e0f9a8b7c
> Script Tree: [covenant_script_leaf]
> Expected Output: bc1p... (32-byte commitment)
> </pre>
>
> === Vector 2: Valid Whitelisted Spend ===
>
> <pre>
> Input: Covenant-only Taproot UTXO from Vector 1
> Destination: bc1qw508d6qejxtdg4y5r3zarvary0c5xw7kv8f3t4 (whitelisted)
> Witness Stack: [signature, merkle_proof, covenant_script, control_block]
> Expected: VALID transaction
> Privacy: Covenant script revealed but appears as normal Taproot spend
> </pre>
>
> === Vector 3: Unauthorized Destination Attempt ===
>
> <pre>
> Input: Covenant-only Taproot UTXO from Vector 1
> Destination:
> bc1qrp33g0q5c5txsp9arysrx4k6zdkfs4nce4xj0gdcccefvpysxf3qccfmv3 (not
> whitelisted)
> Witness Stack: [arbitration_signatures, covenant_script, control_block]
> Expected: Funds redirected to arbitration wallet
> Privacy: Covenant structure fully revealed
> </pre>
>
> === Vector 4: Key-Path Bypass Attempt ===
>
> <pre>
> Input: Covenant-only Taproot UTXO from Vector 1
> Spend Type: Key-path (single signature, no script reveal)
> Witness Stack: [invalid_signature]
> Expected: INVALID (unspendable internal key)
> Result: Transaction rejected by consensus rules
> </pre>
>
> == Implementation Timeline ==
>
> # '''Phase 1''': Reference implementation and test suite
> # '''Phase 2''': Community review and feedback incorporation
> # '''Phase 3''': Testnet deployment and testing
> # '''Phase 4''': Mainnet soft fork activation (if consensus achieved)
>
> == Conclusion ==
>
> This proposal introduces covenant-only Taproot outputs as an optional
> security enhancement for Bitcoin. By leveraging existing Taproot
> infrastructure with invalidated internal keys, we enable invisible
> transaction restrictions that provide institutional-grade protection
> without compromising privacy or usability.
>
> The mechanism offers a balanced approach to high-value Bitcoin security,
> maintaining compatibility with existing systems while providing powerful
> deterrence against unauthorized access. The optional nature ensures no
> impact on users who do not require this additional security layer.
>
> == Acknowledgments ==
>
> The author thanks the Bitcoin development community for their work on
> Taproot (BIP 341) which provides the foundation for this proposal. Special
> appreciation to the designers of the Taproot script commitment scheme that
> enables covenant functionality.
>
> == References ==
>
> * [[bip-0341.mediawiki|BIP 341: Taproot: SegWit version 1 spending rules]]
> * [[bip-0342.mediawiki|BIP 342: Validation of Taproot Scripts]]
> * [https://github.com/bitcoin/bitcoin Bitcoin Core implementation]
> * [[https://bacsociety.com Blockchain Arbitration & Commerce Society]]
>
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