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The much-awaited bitcoin Taproot upgrade went live on November 14. This happened after 90% of bitcoin miners agreed in June to fully upgrade to version 21.1, the latest version of Bitcoin Core. This version contains the code for Taproot. Although the agreement to upgrade was made in June, bitcoin miners waited until now to test the upgrade and look for the possibility of any bugs. During the last five months, the upgrade was carefully tested and retested to have the best experience. An amalgamation of various technological innovations, the Taproot upgrade is supposed to improve the privacy and efficiency of bitcoin transactions. Initially proposed by Greg Maxwell in 2018, Taproot also codifies the three Bitcoin Improvement Proposals (BIP) given by Pieter Wuille, Tim Ruffing, A.J. Townes, and Jonas Nick. In October 2020, all of this merged with Bitcoin Code to form the new upgrade. Unlike the last SegWit upgrade, where the bitcoin miners were highly fragmented, this one seemed quite unanimous.
One of the significant features of the Taproot upgrade is âschnorrâ signatures. So, each individual leaves a fingerprint on their transaction to approve the transaction. Bitcoin used the Elliptic Curve Digital Signature Algorithm until now, which allowed users to create a signature from the private key of the userâs crypto wallet, which was then validated against the public key. For multi-signature transactions, such a system increases the time required to validate the transaction. With the new schnorr signatures, the multiple signatures can be aggregated together and validated. This property of linearity will make the process more efficient. The Taproot upgrade makes the verification process for single signature and multi-signature transactions singular. That means one will not differentiate between simple (one signature) transactions and complex (multi-signature transactions). Therefore, it offers greater privacy and anonymity for multi-signature transactions.
Smart Contracts
Smart Contracts are self-executing digital agreements made on the blockchain. They can be used for any agreement from rent to mortgage payments. Currently, smart contracts are primarily associated with ethereum blockchain. Smart contracts allow businesses to build applications on the blockchain. Theoretically, smart contracts can be executed on bitcoinâs lightning network that allows instant transactions, but its functionality has been quite limited due to scalability problems. They are time-consuming, more expensive, and can offer only a limited number of transactions on the blockchain network. With the Taproot upgrade, bitcoin can enable highly efficient and specific smart contracts. Schnorr signatures can achieve more complex, smart multi-party contracts than what the current lightning network can do. With smart contracts in play, bitcoin could play a much more significant role in the world of decentralized finance (DeFi). It will eliminate the need for intermediaries and allow for efficient and self-executing digital agreements. This will also increase the day-to-day applications of bitcoin.
Greater Privacy
Taproot upgrade will improve the privacy of bitcoin transactions. Anyone can look up a bitcoin transaction using a public explorer. With Taproot, the complex transactions will remain hidden. Using Schnorr signatures, the multi-signature transactions will become indistinguishable from single-signature transactions, therefore, improving the privacy of parties involved in multi-signature transactions. Schnorr signatures allow complex transactions to appear as a single transaction as it combines the multi signatures involved into a single combined aggregate. However, some people are concerned that this new feature will cause government concern over illegal activities associated with cryptos like money laundering and tax evasion.
Cheaper Transactions
Using schnorr signatures, the amount of data required to process multi-signature transactions will be reduced. This will simplify the complicated process and make it more efficient and less time-consuming. Thus, reducing both the time and energy, schnorr signatures will save time and energy - leading to cheaper multi-party transactions.
Scalability
Another issue Taproot would address is Bitcoin's limited transaction space, making scalability a considerable issue for digital currencies. Developers can't just expand this limit without impinging on Bitcoin's decentralization, so they are continually searching for ways of utilizing the currency blockspace all the more effectively. Since Schnorr signatures can be used to aggregate different signatures into one line of data called Merklized Alternative Script Trees (MAST), which will reduce the amount of information stored in the blockchain. This decrease in information size could increase the scalability of MuSig2, for instance, a multi-signature scheme created by Blockstream analysts, which requires various signatures for one exchange.
Benefits For Investors
Several crypto advocates and enthusiasts are bullish on this new update. They feel that Taproot will set the foundation for a new phase of innovation in the bitcoin protocol, primarily focusing on smart contracts. Taproot upgrade is revolutionary for both miners and investors. As the block space for each transaction increases, so does the bitcoin transaction fee. With the Taproot upgrade, complex bitcoin transactions will occupy less block space and, thus, incur lower transaction fees as well. This will encourage investors to make more transactions on the bitcoin network and thus, lead to greater adoption by merchants.
The Taproot update is a revolutionary moment in bitcoinâs history. Taproot is being adopted with a lot of optimism from miners, providing greater scalability, transaction speed, privacy, and cost-efficiency. However, it must be remembered that all the work is not done yet. Users will not be able to benefit from this update until the bitcoin wallet supports it. Most wallets don't, so developers have to write new codes for bitcoin wallets. The taproot will help bitcoin expand beyond just being a cryptocurrency for an exchange to actual blockchain applications like smart contracts. This will lead to greater adoption of the bitcoin network, leading to greater legitimization of the network and the digital currency. But to capitalize on the new upgrade, developers have to continue building specific tools for applications. This is why the Taproot upgrade seems like the foundation for several major technological innovations to come.
Author Bio
Ian Kane is the Co-Founder at Unbanked, a global fin-tech platform built on blockchain. Kane has worked in technology & digital media for over 10 years with a heavy focus on business development, sales, and strategy. His diverse professional background enables him to bring unique insight and experience to every challenge he takes on.
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