How Covenant Protocol works
Breaking new ground as Bitcoin’s first native stablecoin
Covenant is a Bitcoin-native stablecoin protocol. It allows any user to lock BTC as collateral and mint USD-B — a dollar-pegged token — without leaving Bitcoin's security model.
This page explains the full picture: what backs USD-B, how vaults work, and what keeps the peg stable.
The Problem Covenant Solves
Bitcoin is the most secure, most decentralised monetary network ever built. But it has never had a stable unit of account that lives within its own security model.
Every time a Bitcoin holder wants dollar stability today, they are forced to leave — sell their BTC, bridge to another chain, or trust a centralised issuer. In every case, they hand control to an intermediary. A bank. A bridge. An issuer with a freeze function.
Covenant removes that exit.
What Backs USD-B
USD-B is not a claim on a bank account. It is not a synthetic position on a derivatives exchange. Every USD-B in circulation is backed by Bitcoin collateral locked directly on-chain at a minimum 200% collateral ratio — meaning at least $200 worth of BTC must be locked for every $100 of USD-B minted.
The collateral never leaves Bitcoin. It is held in non-custodial Taproot vaults governed entirely by Bitcoin script. No bridge. No wrapped asset. No third-party custodian.
Vaults
A vault is the core unit of the Covenant protocol. When a user mints USD-B, a vault is created. The vault holds:
The user's locked BTC collateral
The outstanding USD-B debt issued against it
The vault is non-custodial by design. The BTC is locked into a Taproot script with two spend paths — one for normal user-controlled operations, and one for liquidation. The user retains primary control at all times. The protocol can only act through the liquidation path, and only when the collateral ratio breaches the safety threshold.
Every vault operation — opening, topping up collateral, repaying debt, closing — executes as a single atomic Bitcoin transaction. There is no intermediate state. Either the operation completes in full, or it does not happen at all.
Minting USD-B
To mint USD-B, a user:
Selects the amount of USD-B they want to issue
Locks the required BTC collateral into a Taproot vault at a minimum 200% collateral ratio
Receives USD-B as a Rune on Bitcoin
The mint transaction is atomic — collateral locking and token issuance happen together in a single transaction. If either step fails, the entire transaction is rejected.
→ See the Mint section for the full architecture.
Redeeming USD-B
To close a vault and reclaim BTC collateral, a user:
Burns the outstanding USD-B debt
The Taproot vault script releases the locked BTC back to the user
Redemption is always available. Even when the oracle is in a degraded or halted state, users retain the right to exit. The protocol is designed so that no system condition can trap user funds.
→ See the Burn section for the full architecture.
Liquidations
If the value of a vault's BTC collateral falls and the collateral ratio drops below 150%, the vault becomes eligible for liquidation.
Covenant uses a deterministic liquidation system. Incentives are pre-specified by the protocol — there are no auctions, no order books, and no discretionary intervention. Any participant can act as a liquidator by burning USD-B to restore the vault's collateral ratio. In return, they receive ownership of the vault and its collateral.
Liquidation incentives scale automatically with market stress: the deeper the collateral ratio falls, the more attractive the liquidation becomes. This ensures the system self-corrects without relying on governance or manual action.
→ See the Liquidation System section for the full mechanics.
The Oracle
Every mint, redemption, and liquidation decision depends on a reliable BTC/USD price. Covenant's oracle aggregates prices from multiple independent sources and applies a five-step anomaly detection pipeline — including statistical outlier filtering, staleness checks, and circuit breakers — before producing a final price.
If the oracle cannot guarantee a reliable price, it halts all price-dependent operations automatically. Burns and exits remain available regardless.
→ See the Oracle Infrastructure section for the full architecture.
Security
Protocol signing authority is distributed across an MPC network using FROST threshold signatures — a Schnorr-native threshold scheme compatible with Bitcoin's Taproot. No single private key ever exists. No single party can unilaterally authorise a spend. Compromise of any individual signer yields no signing power.
Role separation means the oracle signing network, the liquidation signing network, and the protocol signing network are each independently generated and independently operated. Compromising one role grants no authority over another.
→ See the Security section for Defence Layer 1 and Defence Layer 2 in full detail.
USD-B as a Rune
USD-B is represented on Bitcoin using the Runes protocol — a token standard that lives natively on Bitcoin L1 without requiring a sidechain or separate execution environment. This means USD-B inherits Bitcoin's full security guarantees and settles with Bitcoin's finality.
The Three Pillars
Everything in Covenant's design flows from three properties.
Atomicity — Every operation is a single, indivisible Bitcoin transaction. No partial states. No sequencing risk. No intermediate custody.
Sovereignty — Users retain control of their collateral throughout. BTC is locked by script, not surrendered to the protocol. No entity can freeze or redirect user funds.
Stability — The peg is maintained through overcollateralisation and deterministic liquidation rules enforced by Bitcoin itself — not by a governance vote, not by a committee, not by discretion.
→ Each pillar is covered in depth in the following pages.
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