Covenant Emulator

Overview

Covenant emulator is a daemon program run by every member of the covenant committee of the BTC staking protocol. The role of the covenant committee is to protect PoS systems against attacks from the BTC stakers and validators. It achieves this by representing itself as an M-out-of-N multi-signature that co-signs BTC transactions with the BTC staker.

More specifically, through co-signing, the covenant committee enforces the following three spending rules of the staked bitcoins, the equivalence of which is common for PoS systems:

1. If the staker is malicious and gets slashed, the percentage of the slashed bitcoins must satisfy the protocol's fractional slashing percentage.

2. If the staker is malicious and gets slashed, the destination address of the slashed bitcoins must be the unique slashing address specified by the protocol, not any other address.

3. when the staker unbonds, the unbonding time must be no shorter than the protocol's minimum stake unbonding time.

Besides enforcing rules via co-signing, the covenant committee has no other duty or power. If it has a dishonest super majority, then

• it can:

  • refuse to co-sign, so that no bitcoin holders can stake. In this case, no bitcoin will be locked because the protocol requires the committee to pre-sign all the transactions, and

  • collude with the stakers, so that the staker can dodge slashing.

• it cannot:

  • steal the staker’s bitcoins, because all the spending transactions require the staker's signature;

  • slash the staker’s bitcoins by itself, because slashing requires the secret key of the finality provider, which the covenant committee does not know in advance, and

  • prevent the staker from unbonding or withdrawing their bitcoins, again, because the protocol requires the committee to pre-sign all the transactions.

In other words, there is no way the committee can act against the stakers, except rejecting their staking requests. Furthermore, the dishonest actions of the covenant committee can be contained by 1) including the staker’s counterparty in the committee, such as the PoS system’s foundation, or 2) implementing a governance proposal to re-elect the committee.

This rule-enforcing committee is necessary for now because the current BTC protocol does not have the programmability needed to enforce these rules by code. This committee can be dimissed once such programmability becomes available, e.g., if BTC's covenant proposal BIP-119 is merged.

Covenant emulation committee members are defined in the Babylon parameters and their public keys are recorded in the genesis file of the Babylon chain. Changing the covenant committee requires a governance proposal. Each committee member runs the covd daemon (short for covenant-emulator-daemon), which constantly monitors staking requests on the Babylon chain, verifies the validity of the Bitcoin transactions that are involved with them, and sends the necessary signatures if verification is passed. The staking requests can only become active and receive voting power if a sufficient quorum of covenant committee members have verified the validity of the transactions and sent corresponding signatures.

Upon a pending staking request being found, the covenant emulation daemon (covd), validates it against the spending rules defined in Staking Script specification, and sends three types of signatures to the Babylon chain:

1. Slashing signature. This signature is an adaptor signature, which signs over the slashing path of the staking transaction. Due to the recoverability of the adaptor signature, it also prevents a malicious finality provider from irrationally slashing delegations.
2. Unbonding signature. This signature is a Schnorr signature, which is needed for the staker to unlock their funds before the original staking time lock expires (on-demand unbonding).
3. Unbonding slashing signature. This signature is also an adaptor signature, which has similar usage to the slashing signature but signs over the slashing path of the unbonding transaction.

Installation

Prerequisites

This project requires Go version 1.21 or later. Install Go by following the instructions on the official Go installation guide.

Download the code

To get started, clone the repository to your local machine from Github:

$ git clone git@github.com:babylonlabs-io/covenant-emulator.git

You can choose a specific version from the official releases page:

$ cd covenant-emulator # cd into the project directory
$ git checkout <release-tag>

Build and install the binary

At the top-level directory of the project

$ make install 

The above command will build and install the covenant-emulator daemon (covd) binary to $GOPATH/bin:

If your shell cannot find the installed binaries, make sure $GOPATH/bin is in the $PATH of your shell. Usually, these commands will do the job

export PATH=$HOME/go/bin:$PATH
echo 'export PATH=$HOME/go/bin:$PATH' >> ~/.profile

To build without installing,

$ make build

The above command will put the built binaries in a build directory with the following structure:

$ ls build
    └── covd

Another common issue with compiling is that some of the dependencies have components written in C. If a C toolchain is absent, the Go compiler will throw errors. (Most likely it will complain about undefined names/types.) Make sure a C toolchain (for example, GCC or Clang) is available. On Ubuntu, this can be installed by running

sudo apt install build-essential

Setting up a covenant emulator

Configuration

The covd init command initializes a home directory for the finality provider daemon. This directory is created in the default home location or in a location specified by the --home flag. If the home directory already exists, add --force to override the directory if needed.

$ covd init --home /path/to/covd/home/

After initialization, the home directory will have the following structure

$ ls /path/to/covd/home/
  ├── covd.conf # Covd-specific configuration file.
  ├── logs      # Covd logs

If the --home flag is not specified, then the default home directory will be used. For different operating systems, those are:

• MacOS ~/Users/<username>/Library/Application Support/Covd
• Linux ~/.Covd
• Windows C:\Users\<username>\AppData\Local\Covd

Below are some important parameters of the covd.conf file.

Note: The configuration below requires to point to the path where this keyring is stored KeyDirectory. This Key field stores the key name used for interacting with the Babylon chain and will be specified along with the KeyringBackend field in the next step. So we can ignore the setting of the two fields in this step.

# The interval between each query for pending BTC delegations
QueryInterval = 15s

# The maximum number of delegations that the covd processes each time
DelegationLimit = 100

# Bitcoin network to run on
BitcoinNetwork = simnet

# Babylon specific parameters

# Babylon chain ID
ChainID = chain-test

# Babylon node RPC endpoint
RPCAddr = http://127.0.0.1:26657

# Babylon node gRPC endpoint
GRPCAddr = https://127.0.0.1:9090

# Name of the key in the keyring to use for signing transactions
Key = <covenant-emulator-key-name>

# Type of keyring to use,
# supported backends - (os|file|kwallet|pass|test|memory)
# ref https://docs.cosmos.network/v0.46/run-node/keyring.html#available-backends-for-the-keyring
KeyringBackend = test

# Directory where keys will be retrieved from and stored
KeyDirectory = /path/to/covd/home

To see the complete list of configuration options, check the covd.conf file.

Generate key pairs

The covenant emulator daemon requires the existence of a keyring that signs signatures and interacts with Babylon. Use the following command to generate the key:

$ covd create-key --key-name covenant-key --chain-id chain-test
{
    "name": "cov-key",
    "public-key": "9bd5baaba3d3fb5a8bcb8c2995c51793e14a1e32f1665cade168f638e3b15538"
}

After executing the above command, the key name will be saved in the config file created in step. Note that the public-key in the output should be used as one of the inputs of the genesis of the Babylon chain. Also, this key will be used to pay for the fees due to the daemon submitting signatures to Babylon.

Start the daemon

You can start the covenant emulator daemon using the following command:

$ covd start
2024-01-05T05:59:09.429615Z	info	Starting Covenant Emulator
2024-01-05T05:59:09.429713Z	info	Covenant Emulator Daemon is fully active!

All the available CLI options can be viewed using the --help flag. These options can also be set in the configuration file.