Bitcoin Taproot upgrade Explained

Bitcoin Taproot upgrade explained

 

Source: cointelegraph.com 

What is Bitcoin taproot?

Bitcoin taproot update has been experienced since 2017, during the introduction of SegWit to address the blocksize (https://immtalimm.blogspot.com/2023/07/what-is-segwit-in-blockchain.html). Taproot upgrade aims at improving the privacy and the efficiency of the network but on the larger scale such as the implementation of smart contracts which can open door to elimination of intermediaries such as DeFi (Decentralized Finance).

Note: On 12 June, 2021, Bitcoin miners signaled their support for the upgrade with a 90% consensus but Taproot upgrade date was still not finalized until Nov, 2021 and was fully activated as a soft fork protocol at block 709632 on 14 Nov, 2021. This gap purposefully allowed note operators and miners to fully upgrade the Bitcoin Core version to 21.1, which contains the Taproot upgrade. Read more about Bitcoin version and Taproot at https://bitcoin.org/en/releases/0.21.1/.

Who developed the Taproot Bitcoin?

Bitcoin Core developers are still finding ways to expand SegWit capability since its implementation in 2017. One of the cryptocurrency’s leading developers, Greg Maxwell, first submitted the Taproot proposal in 2018. Pieter Wuille is the author of the three Bitcoin Improvement Proposals (BIP) that codified Taproot.

Being the soft fork of Bitcoin, Taproot is backward compatible with the older versions of the software and will not need to separate into parallel blockchains that give rise to altcoins such as Bitcoin Cash. In 2017, SegWit had a dramatic effect on cryptocurrency that led to the split of the network and creation of Bitcoin Cash-leading to hard fork that created two currencies viz., BTC and BCH.

On the other hand, Taproot upgrade is not a hard fork as SegWit. It has extensive support among miners right away, because it brought significant gradual improvements to the code. While miners have already updated their systems to the latest version of Bitcoin software, other players such as exchanges, merchants and regular node operators will upgrade gradually.

Benefit of Taproot on Bitcoin?

The objective of the Taproot is to make Bitcoin faster, more efficient and private. The update allows multiple signatures and transactions to be batched together, making verifying transactions on Bitcoin’s network faster and more straightforward. For example, before the Taproot, transactions getting verified individually by validating a digital signature (like a user’s fingerprints-against a public key) is what Bitcoin’s standard process defines. But the Taproot lets multiple and complex signatures like multi-signatures wallets be aggregated and verified together, rather than individually.  

The main change that will enable this significant transition is the implementation of Schnorr signatures over the Elliptic Curve Digital Signature Algorithm (ECDSA). The ECDSA creates a signature from the private key that controls a Bitcoin wallet and verifies that the rightful owner carries out the transaction.

Traditional Bitcoin Signature vs. Schnorr Singatures

 

Source: cointelegraph.com

Schnorr signatures are more secure than ECDSA. Their linearity allows complex transactions to be verified quickly in batches rather than individually as a single transaction. Thus, multiple collaborating parties can produce a single signature valid for the sum of their public keys, enabling a more straightforward and more efficient method.

By aggregating signatures, the network can process more transactions, making the overall operation faster and cheaper, maximizing the block’s space savings. Thus, the Taproot upgrade will enormously improve Bitcoins’ scalability.

Benefits of the Taproot upgrade on Bitcoin

Further, there will be no more distinction between multi-signature and the single-signature transactions, making it more difficult to identify each participant’s transaction inputs. 

 

Source: cointelegraph.com

Taproot achieves significant milestone by allowing Bitcoin to host smart contracts without fearing that multiple signatures and their complex transactions could clog the system. The size of the information becomes a less data-intensive single-signature transaction. The Taproot upgrade includes 3 interconnected and simultaneous updates as follows:

1.      BIP 340-Schnorr Signatures

Replaces ECDSA and provides a digital signature scheme that is faster, more secure and less data-intensive than ECDSA.

2.     BIP 341-Taproot

Taproot offers a new way to perform Bitcoin transactions by enhancing privacy and flexibility for users. It also activates Merklized Alternative Script Trees (MAS), which condense complex transactions into a single hash, reducing transaction fees, minimizing memory usage and improving the scalability.

3.     BIP 342-Tapscript

Tapscript is the scripting language used for Taproot script-path spends leveraging Schnorr’s efficiency and enables more flexibility on future upgrades.

Bitcoin Taproot Smart Contracts

The Taproot upgrade is a game-changer for Bitcoin as it makes smart contracts cheaper and smaller, due to the reduced space they occupy on the blockchain. With the arrival of Taproot upgrade, Bitcoin emerges as a direct competitor of Ethereum in terms of hosting Smart Contracts. DeFi is one of the smart contract’s most powerful applications. DeFi can facilitate the possibility of borrowing/lending money securely without the third party like a bank.

What Taproot upgrade means for investors?

While Taproot is a technical upgrade and most users will not even notice its happening, with the enhancement of the scalability (faster and efficient), the transaction fees will also decrease due to the lower size of the data size of the complex transactions. This will result in having more space for the entries to be processed on the blockchain-directly affecting the cost-efficiency and functionality of the lightning network.

This lays the technical foundation for accelerating DeFi, offering a great opportunity for entrepreneurs looking to invest in the cryptocurrency-by creating more stable and efficient structure, Taproot will offer more confidence to the investors.

On the other hand, Taproot is seen as a tool affecting the price of the Bitcoin i.e., with the decrease of the cost of the transactions due to lower data size, the price of the Bitcoin will also come down. However, analysts claim that the Taproot may also contribute to making Bitcoin’s price soar, due to the confidence having built in the network.