What exactly is the Taproot upgrade, and how will it help Bitcoin? The Taproot's impact on the network and its implications for investors will be discussed in this article.
Bitcoin Taproot upgrade explained
The Bitcoin Taproot update is the most significant upgrade to the cryptocurrency since the activation of Segregated Witness (SegWit) in 2017. The Taproot upgrade, like SegWit, aims to improve network privacy and efficiency on a larger scale, with a potentially greater impact expected over time.
The upgrade to Bitcoin Taproot will also encourage the use of smart contracts, which can be used to eliminate intermediaries from transactions and open the door to decentralized finance (DeFi) for the top cryptocurrency.
With a 90 percent consensus on June 12, 2021, Bitcoin miners signaled their support for the upgrade. The Bitcoin Taproot upgrade date, on the other hand, was not finalized until November 2021, when it was fully activated as a soft fork of the protocol at block 709,632 on November 14, 2021.
The six-month period between the lock-in and activation was designed to allow node operators and miners to fully upgrade to the most recent Bitcoin Core version 21.1, which includes the Taproot upgrade.
This article focuses on the most significant changes that the Taproot upgrade brings to the Bitcoin protocol and how they will benefit Bitcoin in the long run.
Who developed Taproot Bitcoin?
Since SegWit's implementation in 2017, Bitcoin Core developers have looked into ways to expand its capabilities. Greg Maxwell, one of the cryptocurrency's leading developers, first proposed Taproot in 2018.
Pieter Wuille wrote the three Bitcoin Improvement Proposals (BIPs) that became Taproot. In 2020, developers Tim Ruffing, A.J. Townes, and Jonas Nick joined the project and collaborated with Maxwell and Wuille to implement the upgrade.
Taproot, as a soft fork of Bitcoin, is backward compatible with older versions of the software and will not need to split into two separate parallel blockchains and cryptocurrencies, as Bitcoin Cash did.
SegWit became famous in 2017 for the dramatic effects it had on the cryptocurrency, which resulted in the network splitting and the creation of Bitcoin Cash. This upgrade increased the size of Bitcoin blocks without jeopardizing important properties such as decentralization.
The opposing viewpoint advocated for larger blocks without implementing SegWit. Because there was no longer agreement on the same protocol, the need to hard fork the Bitcoin blockchain arose, and two distinct cryptocurrencies, Bitcoin (BTC) and Bitcoin Cash, were created (BCH).
Taproot is not as contentious as SegWit and is not a hard fork. It quickly gained widespread support among miners, owing in part to the significant gradual improvements it brought to the code.
While miners have already widely updated their systems to the latest version of Bitcoin software, other players, such as exchanges, merchants and regular node operators, will upgrade gradually, according to their priorities.
Despite massive support across the board, Taproot adoption is expected to grow gradually over time, as happened with the SegWit upgrade. The impact on DeFi through smart contracts will also be noticed over the years, but it’s expected to be significant.
What is the Taproot and how does it benefit Bitcoin?
The ultimate goal of the Taproot is to make Bitcoin faster, more efficient, and private.
The update enables the batching of multiple signatures and transactions, making transaction verification on the Bitcoin network faster and easier.
Here’s how the Taproot benefits Bitcoin
Before the Taproot, Bitcoin's standard process implied that transactions were verified individually by validating a digital signature — similar to a user's fingerprints — against a public key. Multiple and complex signatures, such as multi-signature wallets, can now be aggregated and verified collectively rather than individually, thanks to the Taproot upgrade.
The implementation of Schnorr signatures over the Elliptic Curve Digital Signature Algorithm is the main change that will enable this significant transition (ECDSA). The ECDSA algorithm generates a signature from the private key that controls a Bitcoin wallet and verifies that the transaction is being carried out by the rightful owner.
ECDSA signatures are less secure than Schnorr signatures. Because of their linearity, complex transactions can be verified in batches rather than individually as a single transaction. Multiple collaborating parties can generate a single signature that is valid for the sum of their public keys, allowing for a simpler and more efficient method.
The network can process more transactions by aggregating signatures, making the overall operation faster and cheaper while maximizing the block's space savings. The Taproot upgrade will vastly improve Bitcoin's scalability, which many consider to be one of the major impediments to widespread adoption.
The Taproot improves privacy by eliminating the distinction between multi-signature and single-signature transactions. As a result, identifying each participant's transaction inputs where the private data is stored becomes more difficult.
The Taproot marks an important milestone by allowing Bitcoin to host smart contracts without fear of multiple signatories and their complex transactions clogging the system. The information size is reduced, resulting in a less data-intensive single-signature transaction.
The Taproot upgrade included three interconnected and simultaneous updates
The Taproot upgrade allows you to combine three different proposals that are all related to improving Bitcoin's scalability. Proposals to change the Bitcoin protocol or even fix bugs must go through a specific submission process. In the absence of a centralized authority, a BIP is used as a standard procedure, beginning with simple ideas submitted to the community by developers.
When other developers show interest in the proposal, it is added to the Bitcoin Core GitHub repository of BIPs awaiting activation. As explained below, the Taproot upgrade includes three concurrent BIPs.
BIP 340 - Schnorr Signatures
Schnorr, which replaces ECDSA, provides a digital signature scheme that is faster, more secure, and requires less data than ECDSA.
BIP 341 - Taproot
Taproot provides a new way for users to conduct Bitcoin transactions by increasing their privacy and flexibility. It also enables Merklized Alternative Script Trees (MAST), which condense complex Bitcoin transactions into a single hash, lowering transaction fees, reducing memory usage, and improving Bitcoin's scalability.
Working of the Merkelized Abstract Syntax Trees to partition the execution of complex Bitcoin scripts
BIP 342 - Tapscript
Tapscript is the scripting language that Taproot uses for script-path spends. This update takes advantage of Schnorr's efficiency and allows for greater flexibility in future upgrades.
Bitcoin Taproot Smart contracts
The Taproot upgrade is a game changer for Bitcoin's utility because it makes smart contracts cheaper and smaller because they take up less space on the blockchain. Smart contracts are self-executing blockchain-based agreements between two people that can create a secure transaction without the need for an intermediary.
The Taproot's approach to scalability strengthens Bitcoin's ability to host smart contracts on the main chain. As a result, the top cryptocurrency emerges as a direct competitor to Ethereum, the more popular smart contract competitor.
This update opens up a slew of new possibilities for Bitcoin, as smart contracts hold a lot of promise for real-world applications. One of the most powerful applications of smart contracts is decentralized finance (DeFi). They can make it possible to borrow or lend money securely without the need for a third party intermediary such as a bank or financial institution.
Smart contracts can also be used for any type of transaction or day-to-day practical activity, such as paying rent on a monthly basis or registering ownership of an item.
What the Bitcoin Taproot upgrade means for investors
The Taproot is a technical upgrade that most users will not even notice. However, investors should keep an eye on this event because the long-term implications for the top cryptocurrency could be enormous.
The Taproot is a long-awaited solution to many of Bitcoin's traditional issues. Scalability has always been a top priority for Bitcoin developers, and the Taproot provides the tools required to make Bitcoin faster and more efficient.
As a result, fees will be reduced because the data size of complex transactions will shrink, allowing for more entries to be processed on the blockchain. The Taproot will have a direct impact on the Lighting Network's cost-efficiency and functionality, making it more flexible for developers who want to build on it, as well as cheaper and more private for users.
This lays the technical groundwork for DeFi's peer-to-peer financial services on the Bitcoin network to accelerate. The Taproot expands Bitcoin's utility, providing a fantastic new opportunity for entrepreneurs looking to invest in the cryptocurrency's potential over the long term. The Taproot, by establishing a more stable and efficient structure, should provide investors with greater confidence in the top cryptocurrency fundamentals.
In terms of price, the impact of the Bitcoin Taproot upgrade will be seen over time. Bitcoin's value skyrocketed in the days leading up to the Taproot upgrade, reaching an all-time high of $64,000 on November 12, 2021. A series of events, including the adoption of Bitcoin as legal tender in El Salvador and its viability as a hedge against inflation, resulted in a price increase for the cryptocurrency.
Analysts claim, however, that the Taproot has significantly increased Bitcoin's value as trust in the network grows. However, it is difficult to predict how the upgrade will affect the price of Bitcoin in the future. At the moment, it appears that the soft fork has already been priced in, and that it will primarily benefit network efficiency while having no direct impact on short-term price movements.
Without a doubt, Bitcoin's potentially expanded adoption of smart contracts will take a sizable market share away from other smart contract platforms such as Ethereum (ETH), Solana (SOL), or Cardano (ADA) (ADA).
The decision of whether institutional and mainstream participants will stick with existing platforms or switch to Bitcoin will be an exciting challenge to watch over the next few years.