Here is a potential architecture using covenants on liquid.
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Yes. In principle, an ecash token can encode redeemable rights to covenant-governed liquidity within a Liquid-based channel factory, thereby merging three paradigms—Chaumian privacy, covenant-level contract enforcement, and state-channel scalability—into a unified system. Let’s unpack this at the structural and game-theoretic levels.
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1. Conceptual Frame
You are describing an architecture where:
The underlying substrate is a covenant-based UTXO network (Liquid or a similar sidechain with expanded script expressiveness).
Liquidity pools (L-BTC or assets) are held in channel factories—multi-party covenants that pre-commit channel topology and enforce non-custodial updates.
Cashu tokens represent rightful claims to use or redeem liquidity from this covenant network, not direct ownership of UTXOs.
This converts Cashu from a “claim on a custodian” to a “claim on a self-enforcing covenant space,” effectively making ecash tokens function as access credentials to a liquidity lattice.
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2. Channel Factory as a Covenant Layer
The Factory
A channel factory is a pre-funded covenant structure that allows many bidirectional payment channels to exist off-chain under a single on-chain multisig anchor.
Every participant holds pre-signed transactions for any cooperative or unilateral exit.
Covenant Enforcement
Liquid’s Elements script supports OP_CHECKSIGFROMSTACK and (with soft-fork extensions) programmable spending conditions that can mimic covenants—rules binding future spending behavior.
Thus, a factory can encode rules like:
allocation of liquidity shares,
permissioning of channel creation,
conditions for rebalancing or withdrawal.
This means rights to liquidity can be represented not by addresses, but by state commitments within the covenant.
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3. Ecash Tokens as Liquidity Rights
Structure
Each Cashu token becomes a blindly signed credential asserting:
A claim to X units of liquidity in a given covenant instance (identified by hash),
Optional usage parameters (e.g., valid for routing fees, liquidity leases, or factory channel openings).
The mint (or covenant oracle) blind-signs the token, but redemption is validated by covenant logic, not discretionary action.
When redeemed, the covenant contract verifies the signature and transfers corresponding liquidity or grants the right to open a channel funded by the covenant’s pool.
Implications
Privacy: Off-chain circulation remains unlinkable, preserving Cashu’s Chaumian anonymity.
Enforcement: The underlying liquidity cannot be double-assigned, because the covenant validates token uniqueness upon redemption.
Composability: Tokens can serve as liquidity “vouchers” usable by routing nodes, factories, or other covenants as composable capital.
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4. System Lifecycle
(1) Funding
Participants deposit L-BTC into a covenant-based factory. This factory exposes a liquidity registry—a Merkleized list of issued rights.
(2) Issuance
A federation or oracle signs Cashu-style blinded commitments referencing liquidity claims in the registry.
(3) Circulation
Tokens circulate freely off-chain, transferring rights between users without any ledger interaction.
(4) Redemption / Activation
When a holder redeems, they:
Reveal the unblinded proof.
Specify how the liquidity should be used (withdrawal, channel open, swap).
The covenant verifies authenticity and updates the internal state to mark that portion as spent or reassigned.
The enforcement happens inside the factory covenant, not via any human custodian.
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5. Theoretical Properties
Property Description
Trust Assumption Enforced by script-level covenant logic, not by any operator.
Scalability Off-chain transfers are O(1); redemptions or state transitions are batched on-chain.
Privacy Full anonymity of ownership and transfer, bounded only by redemption frequency.
Liquidity Fungibility Ecash tokens become portable liquidity rights—usable by any factory participant or protocol integrated with the covenant.
Programmability Factories can encode yield, routing rights, or collateral staking directly in script conditions.
This collapses the dichotomy between ecash and state channels: both become representations of off-chain state commitments to covenant-controlled liquidity.
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6. Relation to Ark and Fedimint
Compared to Ark:
Ark gives users individual virtual UTXOs controlled via pre-signed transactions from a host. Your model removes the “host” entirely, replacing it with a covenant factory that enforces ownership transitions by script.
Compared to Fedimint:
Fedimint federates trust; covenant factories eliminate it by encoding multi-party exit logic into deterministic spending rules.
Thus, covenant-based factories represent the cryptographic endpoint of the Fedimint → Ark → trustless-ecash evolution chain.
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7. Strategic Implications
Legal Non-Custody: Since liquidity allocation is algorithmically enforced, operators are not money transmitters; they are participants in a multiparty covenant.
Compositional Finance: Ecash tokens could serve as composable capital primitives—redeemable across liquidity networks, staking pools, or payment rails.
Monetary Symmetry: The bearer asset (ecash token) and the enforcement substrate (covenant network) converge, producing a circular economy of verifiable liquidity rights without institutional custody.
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8. The Path Forward
Realization depends on:
Expanding Liquid’s covenant capabilities (OP_CAT, OP_TXHASH, or new covenant opcodes).
Standardizing a blind signature verification path usable inside covenants (perhaps via adaptor signatures or MuSig2 commitments).
Developing a state commitment index (Merkleized registry) that ties ecash issuance and covenant states together.
Once these are achieved, yes—Cashu tokens could function as bearer rights to covenant liquidity, yielding a self-sovereign, cryptographically enforceable monetary substrate: anonymous yet redeemable, private yet auditable, fungible yet programmatically bound to real liquidity.
