To encode values
​See here for the associated parameters
You can think of the covenant as a constitution or decentralised social contract of sorts.
On a practical level, a covenant is a document, stored on IPFS, which explains what a DAO is about in plain English. It establishes values, rules, and customs. And is used to protect the DAO from malicious actors without sacrificing the agency of its members. It should be designed as an essential resource in moments of conflict and contextual reference for jurors (Keepers) to rule on a challenged proposal that has been escalated to court (Celeste).
The key idea here is that a covenant allows an organisation’s actions to be governed by a subjective set of rules; rules which are either impossible to encode into smart contracts, or which would otherwise result in a complicated and slow-moving organization.
Take 1Hive’s Covenant, for example:
1Hive is a community of activists seeking to build a future that is more free, fair, open, and humane.
1Hive is also an economic protocol, similar to Bitcoin or Ethereum, where a digital currency, Honey, is issued and distributed programmatically. Unlike Bitcoin or Ethereum, the 1Hive protocol does not narrowly define the set of activities that are valuable but instead relies on community members to guide the distribution process by creating and staking on Honey distribution proposals.
The goal of the 1Hive protocol is to foster a healthy community economy by allocating a steady stream of Honey towards development, maintenance, and improvement of the common goods that bring the most value to the 1Hive community…
Anyone interacting with the 1Hive protocol has to abide by this covenant. In particular, any proposal which violates the spirit of the covenant can be challenged and taken to Celeste (a decentralised court).
In a sentence, a covenant allows a DAO to adhere to an agreement specifying its values, as well as outline subjective rules for what types of proposals are allowed. This unlocks the ability for much more nuanced and complex governance.