As the crypto market matures and continues to evolve and sprout out in new directions like DeFi, Web 3.0 and NFTs, even Bitcoin, the genesis blockchain, requires incremental nips and tucks from time to time in order to finetune its functionality and keep it in pole position for its notoriously loyal community.
Back in July 2017, Bitcoin underwent the Segregated Witness (SegWit) upgrade that addressed scalability issues. This was soon followed by the controversial Bitcoin Cash hardfork, a move sparked by a failed coup to increase the block size of Bitcoin in order to facilitate more transactions.
Four years later, on November 14th 2021, Bitcoin’s long-anticipated Taproot upgrade was finally activated, bringing with it cheaper transactions, more privacy, and better smart contracts to the world’s leading cryptocurrency.
One of the most significant features of the Bitcoin blockchain is the staunch resistance by the miners who administer the system to make changes to the software and function. This steadfast commitment to proceed conservatively provides the bedrock for predictability and stability that gives Bitcoin its ‘digital gold’ status—a characteristic that long-term investors seek.
The permanent rift in the early Bitcoin community caused by the Bitcoin Cash debacle demonstrated just how difficult it was to introduce any permanent change into the Bitcoin protocol. Previously proposed changes to Bitcoin’s protocol have fractured parts of the Bitcoin network into splinter versions of Bitcoin’s code—BitcoinXT, Bitcoin Classic, Bitcoin Unlimited, Bitcoin Cash, Bitcoin Gold, etc. The fact that these Bitcoin spin-offs remain relatively unknown to the average investor affirms Bitcoin’s legacy as the premium store of value.
Even the SegWit upgrade, when it was implemented four years ago, proved to be a tinderbox that almost triggered a civil war between node operators. Thankfully, Taproot has sailed into implementation with almost universal support.
So, what’s different this time? What’s changing?
What is Bitcoin Taproot?
Taproot merges different technical improvements throughout Bitcoin’s history into one long-awaited upgrade. First suggested by Greg Maxwell in 2018, it was approved through three Bitcoin Improvement Protocols (BIP) implemented in November 2020, and given the green light in June 2021 when 90% of miners signaled their support of the upgrade contained in Bitcoin Core version 21.1 .
Bitcoin Taproot, activated at block 709,632, allows programmers to develop and introduce new functionalities that will help improve privacy and better scale and secure the network.
How does Taproot enhance privacy, security and scalability?
One of Bitcoin’s features is that transactions happen out in the open on the public blockchain. The possible downside of this, though, is that every transaction leaves indelible fingerprints of the participating wallets.
Currently, Bitcoin uses the Elliptic Curve Digital Signature Algorithm (ECDSA), a method that produces a digital signature derived from the private key of the Bitcoin wallet in the transaction.
Taproot will replace the ECDS algorithm with a new protocol known as Schnorr Signatures. Schnorr makes signatures more private and alters multi-signature transactions to make them indistinguishable from private single-signature transactions.
Taproot also improves and increases scalability, making the Bitcoin system more efficient at handling layer-2 and batch transactions.
How does Taproot work?
Regardless of whether a transaction involves a standard single-user wallet or multi-signature participants, the Schnorr update strips away the details of wallet endorsers, making all transaction types indistinguishable from one another.
By presenting a single key for all transactions, even multi-sig ones, Schnorr also lightens the transaction load on the blockchain, thereby increasing the blockchain’s speed and efficiency.
Likewise, opening and closing a Lightning Network channel has always presented a unique signature that observers could easily identify and scrutinize. Taproot now converts Lightning into ordinary transactions, creating an additional layer of privacy for Lightning transactions.
It’s a win-win all round—third-party observers can no longer detect which transactions are generated by multiple endorsements, and sensitive transactions that require multiple signatures get a new level of anonymity.
This is an upgrade ‘underway’ since not all miners and wallet makers have updated to this software version of Bitcoin in the decentralized network.
The Schnorr signature is compatible with the formerly used ECDSA. This is very important, as it means that exchanges, custodians, and wallets can continue with full functionality using the old regime, delaying their upgrade for as long as necessary.
What’s the likely impact of Taproot?
Will Taproot move the needle on Bitcoin’s price in the short term? No. That’s not its purpose.
However, time is money, and faster transactions means the ability to process more transactions, which will likely help lower transaction costs.
Faster and cheaper transactions will translate into more network efficiency and value—which will ultimately have a price impact in the medium term.
In the long term, the cumulative effect of improved efficiency and stability steadily solidifies Bitcoin’s foundation—future-proofing it—which positively impacts long-term price.
Also, better camouflaged transactions shift Bitcoin steadily toward the kind of custody compliance solution that pleases the SEC and thereby smooths the path toward the much anticipated and desired Spot ETF.
Does Taproot and its Schnorr now make Bitcoin a privacy coin?
No. The view into transactions is still entirely transparent; only the tracking of individual wallets becomes much more of a challenge.
What about the smart contracts then? Is Bitcoin the new “Ethereum Killer?”
Smart contracts are software instructions that allow transactions to proceed when predetermined conditions are met. As it stands, Bitcoin’s capacity to provide smart contracts is limited by the low speed and, therefore, high cost of transactions. Taproot’s boost in efficiency promises to smooth out this road bump, making Bitcoin significantly more capable of competing against other protocols in the smart contract space.
Bitcoin’s vital Taproot upgrade marks yet another critical milestone, cementing its dominant position as the market leader—maintaining all of the characteristics that make it secure while positioning it to better serve the broadest possible customer base. The ease with which it was proposed, codified and ultimately implemented, shows that the Bitcoin community is not opposed to necessary changes, and promises to act as a significant precedent when battles over Bitcoin’s future are surely to be one day fought again.