A Cryptographic Covenant Philosophy: True Individualism and Vision Fusion

Covenants are fulfilling a new philosophical mission, merging dual forces of the defensive and offensive, the conservative and the creative, and allowing true individualism to flourish. This philosophical mission is primarily anchored in the article, “Individualism: True and False” by F. A. Hayek, the book, “A Conflict of Visions: Ideological Origins of Political Struggles” by Thomas Sowell, and in coordination game theory. 

Hayek’s True Individualism vs Cartesian Rationalism

In Individualism: True and False, Hayek compares two forms of individualism: the true form and the incorrect rationalistic form. True individualism is not a kind of isolationism, where beings are completely self-sufficient without the need for others; rather, true individualism starts with human beings whose character and behavior are profoundly shaped by living in society, where social institutions such as our organizations, communities, traditions, and markets help develop the individual and where the individual forms them. In game-theoretic terms, we can think of this as the difference between prisoner dilemma games and coordination games, such as the stag hunt.

The prisoner’s dilemma is a situation where each person acting in their own self-interest leads to a worse outcome for both than if they had cooperated. The game can be portrayed in the chart above. Let’s imagine two people in the state of nature without a ruling authority (think about Hobbes’ thought experiment in Leviathan), and each rationalizes whether to attack the other. The numbers show the outcome for Player 1 first, then for Player 2. If neither attacks, both get (-1, -1), the best mutual outcome. But each has an incentive to renege and attack: if one attacks while the other does not, the attacker gets 0 and the other gets -10. Because each fears being the one who does not attack, both attack, producing (-6, -6)—a worse outcome for both than mutual restraint. 

A stag hunt is a situation in which cooperation yields the best outcome, but choosing the safer option avoids the risk that others will not cooperate. In the chart, if both hunt stag, they each get 5, the best outcome. But if one hunts stag while the other hunts rabbit, the stag hunter gets 0 while the rabbit hunter gets 3. Hunting rabbit is therefore safer because it always gives 3, creating a choice between trusting the other player for the better outcome (5, 5) or settling for the safer outcome (3, 3).

However, it’s important to note that the problem isn't necessarily that people disagree about what they want; it's that their willingness to act depends on knowing that enough other people will act too.

The best way to think about this is in terms of how liquidity providers may act within particular on-chain liquidity pools. For example, Alice might say, “I'll move my liquidity if at least $10 million of other liquidity moves too.” Bob might have a similar condition. Individually, neither wants to move first and risk ending up in the bad outcome. If a coordination mechanism were in place whereby Alice and Bob make conditional commitments—I do X if enough others also commit to X—the system could execute everyone's actions together once their conditions are mutually satisfied.

So what’s the incorrect kind of individualism? While Hayek associates true individualism with the British/Scottish tradition -  such as Locke, Hume, Adam Smith, Ferguson, Burke, and Tocqueville - he associates false individualism with Cartesianism and the rationalist tradition. According to Hayek’s conception of Cartesian rationalism,  an individual is viewed as a homo-economicus: an abstract, self-contained, hyper-rational individual who can be understood independently of the social institutions, traditions, norms, and relationships in which actual people live. This view of the individual is favored by orthodox economics, whereby the individual is perfectly rational, has given preferences, possesses relevant information, and can calculate the optimal choice. This form of individualism paradoxically creates a collectivist community where central planning is key. If individual behavior can be rationally calculated (it cannot), then behavior and the markets guided by it can be managed. This is in direct opposition to true individualism, where true individualism begins with human fallibility and limited knowledge - i.e., no one person or a group of people can know everything and have perfect knowledge of the world’s relationships. This is known as Hayek’s local knowledge problem. 

Thus, true individualism brings about spontaneous order where voluntary action rules; false individualism, on the other hand, brings about central management. 

“Every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.” Hayek (The Use of Knowledge in Society) 

A Conflict of Two Visions: The Constrained View and Unconstrained View

In his book A Conflict of Visions, Sowell develops a theory to explain why the same broad political and philosophical disagreements keep recurring across seemingly unrelated subjects. He answers that underneath specific arguments about economics, law, war, equality, crime, and so on, people begin from fundamentally different assumptions about human nature, reason, knowledge, and how society works. He calls these underlying frameworks “visions,” i.e., the constrained and unconstrained vision. However, it’s important to note that they're ideal types rather than boxes into which every thinker fits perfectly.

The constrained vision starts with the assumption that there are severe and persistent limits on human beings whereby beings are self-interested, morally imperfect, intellectually limited, and possess only tiny fragments of society's total knowledge. Thus, under the constrained view, it wouldn’t make sense to ask how the perfect society could be created; rather, we should ask, “given that beings are imperfect, what institutions produce the least-bad outcomes?” This is in line with Hayek's epistemology (as well as George Soros' theory of reflexivity). In other words, we need to constrain ourselves and offer the necessary limitations to maintain strict order. With respect to the crypto landscape, the constrained vision is the underlying philosophy of Bitcoin (conserve what is and caution what could be). 

Conversely, the unconstrained vision assumes that human nature and society can be improved through deliberate reason and desired outcomes. It takes a much more open and creative approach to solving social coordination and problems. In other words, reason itself can improve human beings and, in turn, society. Thinkers of this vision are William Godwin and Jean-Jacques Rousseau. In the crypto landscape, the unconstrained view is best represented by Ethereum, whereby its founder, Vitalik Buterin, praises Ethereum as operating beyond physical limitations (in the way that Bitcoin does); it provides a new virtual form “beyond physics,” which could otherwise be thought of as a new particular form of accelerationism. 

A History of Covenants: True Individuality and the Two Vision Fusion 

Covenants have long been discussed and debated since Bitcoin's inception, especially regarding Bitcoin’s OP_CAT proposal. A covenant is a rule attached to coins that restricts how those coins may be spent in a future transaction. A normal Bitcoin transaction example allows the following: “1 BTC can be spent if Alice provides the correct signature.” A covenant, however, can add another condition to allow transactions of the following type: 

“Alice's signature is required, AND these coins may only be sent to address X.” 

Or, “These coins can only be spent after 30 days and must go to one of these approved outputs.”

Or, “If these coins move, the next output must contain this same covenant.

In other words, covenants allow conditional rules governing how and where coins may be spent, much like a stag-hunt coordination game, allowing true individualism to flourish. If we think about the liquidity pool example, we can imagine how covenants enable complex, coordinated action en masse. 

Bitcoin’s Failed Covenant Attempt 

Enacting covenants on Bitcoin is problematic for two reasons. First, Bitcoin Script is very limited, and it’s limited in three important ways: (a) Script executes linearly without loops; (b) it lacks many basic arithmetic/data-manipulation operations; and (c) scripts have very limited ability to inspect transactions that are attempting to spend the coins. In a normal programming language, you can tell a computer to repeat an operation 1,000 times or to repeat Y until condition X becomes true - this is known as a loop. Bitcoin Script doesn’t allow this type of looping; instead, it only allows predetermined sequences. Moreover, Bitcoin Script lacks operations for multiplication, division, and concatenation. The third problem, (c), is the most crucial. Suppose Alice wants to impose a rule whereby certain coins can only be spent to address X - this is known as transaction introspection. 

OP_CAT takes two pieces of data and joins them (i.e., A + B → AB), a process known as concatenation. This sounds simple, but concatenation could enable indirect introspection via Bitcoin's Schnorr signature machinery, allowing reconstruction or manipulation of transaction-related data. The complexity concentration offers is best explained by Andrew Poelstra in his blog post, CAT and Schnorr Tricks. In other words, OP_CAT can form conditional transaction operations via indirect means, such as vaults. 

Moreover, OP_CAT could handle recursive covenants whereby conditional restrictions are propagated across successive transactions. So, you're no longer merely restricting the next spend. You can create rules that continue affecting future descendants of coins. 

However, implementing OP_CAT for covenant use, especially recursive covenants, is quite controversial and for good reason. First of all, Bitcoin’s base layer isn’t designed for this level of complexity; therefore, one would need to implement additional architecture and layers, and, as a result, we encounter problems with MEV, centralized L2 sequencing (potential failure of censorship resistance), and base layer bloat. Moreover, we still have to deal with Bitcoin’s slow block speed. Most importantly, OP_CAT isn’t elegant. It wasn't designed for covenant implementation; it’s a tedious workaround. This is where Kaspa comes into the picture. 

A Case Study: Kaspa’s Alternative Solution to Bitcoin’s OP_CAT

Rather than deriving covenant-like behavior from a general primitive (i.e., OP_CAT) and using workaround scripting, Kaspa provides scripts with direct transaction introspection. Its covenant system includes opcodes specifically allowing a script to inspect properties of the transaction spending the UTXO; therefore, it is purpose-built, whereby conditional coordination is explicit. However, the secret sauce is within Kaspa’s covenant ID system. Suppose we create a covenant representing an application:

State 0

↓ valid transaction

State 1

↓ valid transaction

State 2

↓ valid transaction

State 3

But then we must ask the following: how does Kaspa know that State 3 really belongs to the same covenant/application lineage that started at State 0? Without special protocol support, the script may have to prove its ancestry. This is where Kaspa truly shines as its consensus mechanism, i.e., GHOSTDAG and the future iteration DAGKNIGHT, itself tracks a covenant ID associated with the relevant UTXO lineage. This turns covenants into something much closer to local state machines. It’s important to note that this is quite different from Ethereum’s giant shared global state; instead, Kaspa is preserving the local state and providing an answer for Hayek’s local knowledge problem. With Silverscript, the secret sauce only gets better as developers can implement loops, functions, and arrays - solving problems (a) and (b) of Bitcoin Script. 

This is just the beginning, with optional ZK, advanced computation can take up the notch for sophisticated coordination and speed. Moreover, within DAGKNIGHT, allowing α (security parameter), ε (error tolerance), and Δ  (upper bound delay) to be locally decided and determined by nodes rather than some overarching central rule (such as Bitcoin’s upper bound delay), Hayek’s true individualism becomes true individualism on steroids. We no longer become isolated cypherpunks but connected individuals. 

By allowing for positive creation through covenant coordination (unconstrained vision) atop a Nakamoto-iterated defensive base layer (constrained vision), we truly unite the opposing forces underpinning all social problems and relationships; a cryptographic feat never accomplished until now. And this is all without talking about based-rollups; another time.