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Known risks & limitations

Covenant is transparent about what it does not guarantee. The following are documented, accepted limitations of the current MVP. None of them are hidden in the contracts.

Liquidity / seller risk​

Retention is permanent. Sellers forfeit the retained 20% of their sell — it is not an escrow and is never returned. A covenant is a real obligation handed to the mechanism, not a delayed withdrawal.

Reference-price risk​

A covenant's reference price is the realized price of its sell. On a thin testnet pool this price is manipulable — someone could move the pool to create covenants at a distorted basis. This is a documented, accepted MVP limitation; a production version would want a manipulation-resistant price (e.g. a TWAP).

Discount risk​

The absorption discount moves with covenant stress between the 5% floor and the 20% cap, and is frozen per covenant at creation. Buyers absorb at that fixed discount; the value they receive depends on where the reference price sat at creation.

Queue risk​

Absorption is FIFO. A matured covenant at the head of the queue pauses absorption until someone calls the permissionless settlement sweep to clear it. In practice anyone can unblock the queue at any time, but until they do, new buys cannot absorb behind a matured head.

Market-condition risk​

In a sustained downturn, forced absorption can be unfavorable, and the reserve dynamics can leave debt outstanding: if everything is absorbed without reaching expiry, covenantReserveETH may sit idle rather than pairing into LP. These are inherent to the mechanism, not bugs.

Creator address must be a payable EOA​

The 3% tax is paid in ETH to the immutable creator. That address must be able to receive ETH (a payable EOA). A contract creator that reverts on receive would block tax payouts and, by extension, the protocol. This is a deployment-time responsibility.

What Covenant never promises​

Covenant does not promise price stability, dump protection, guaranteed yield, guaranteed buyer absorption, or zero risk. It is a market-structure primitive: it changes what a sell becomes and lets the market decide. Combined with the fact that it is unaudited (see the security review), treat participation accordingly.