BIP Booby Trapped Wallets - Covenant-Only Taproot Outputs

Authored by Matias Monteagudo, this Bitcoin Improvement Proposal (BIP) advocates for an additional, voluntary security layer that could fundamentally alter how high-value Bitcoin wallets defend against unauthorized access. Central to this proposal is the concept of covenant-only Taproot outputs, which essentially prohibit key-path spending—a conventional method allowing transactions to be signed off directly with a private key—thereby enforcing transactions to exclusively proceed via script-path spending. This mechanism not only restricts transactions to pre-approved destinations but also cleverly conceals these restrictions until an actual attempt at unauthorized access is made, thus adding a robust layer of security while maintaining transaction privacy until it's necessary to reveal such details.

The underlying motivation for this BIP stems from the escalating security risks faced by large-scale Bitcoin operators, such as exchanges, where the visible nature of current security protocols does little to deter advanced cyber threats. By enabling wallet owners to limit transaction flows to specified destinations and automatically diverting any unauthorized transactions to so-called arbitration wallets, the proposed system aims to maintain operational normalcy, thereby deterring potential attackers who rely on preemptive knowledge of security measures. The technical groundwork for implementing these covenant-only Taproot outputs involves invalidating the internal key to make key-path spending nonviable, ensuring all transactions comply with the set covenant conditions. A detailed activation plan adheres to the BIP 9 framework, calling for widespread miner consensus before this new protocol can take effect, assuring backward compatibility to preserve the existing ecosystem's integrity.

From a security standpoint, the proposal meticulously outlines cryptographic safeguards to render the internal key unusable, thus blocking direct path spending avenues. It further suggests concealing the covenant logic to prevent attackers from identifying and exploiting potential vulnerabilities ahead of their malicious attempts. On the economic front, the proposal posits that creating a high-risk environment for theft, promoting fair arbitration practices, and highlighting the network-wide benefits of improved security protocols could collectively enhance the Bitcoin network's resilience against attacks without sacrificing privacy or efficiency. Final sections of the proposal include reference implementations for essential validation logic, wallet integration guidelines, and test vectors to assess the proposal's practical viability. The document closes with acknowledgments to the broader Bitcoin development community and credits to the creators of the Taproot script commitment scheme, indicating a phased review, testing, and eventual deployment strategy aimed at significantly enhancing institutional Bitcoin security without compromising the user experience or network performance.