I still don’t understand how covenants  improve the situation for low value amounts. 

If I have $10 in my own UTXO or $10 in a shared UTXO, it will still cost me roughly the same amount in fees to transfer it on the L1 chain. 

Why does having more keys per UTXO make anything cheaper if it costs you the same amount in transaction fees?

It doesn’t seem to matter if the covenant encodes a future payment to you if the payment amount is small and fees are high and rising over time. You’re still going to pay a significant amount in fees.

I don’t agree that block space is practically unbounded. Sure we could increase it, but it’s like making more roads to decrease traffic. It just encourages more people to buy cars and fill the roads. Building more roads gives a temporary benefit but eventually the traffic is back to the original level or even worse. 

If we lower the economic cost of blockspace, people will just fill it with lower value data (like spam JPEGs) and we’ll reduce decentralization.