#Crypto 360
The Bitcoin Taproot Upgrade was introduced in November 2021, seeking to streamline transaction verification and fortify privacy.
➔ The Bitcoin Taproot Upgrade was introduced in November 2021 to enhance the privacy, efficiency, and scalability of the Bitcoin network.
➔ The upgrade was led by Gregory Maxwell and crystallised into a BIP by Pieter Wuille.
➔ The Taproot upgrade addressed Bitcoin's scalability challenges and solidified its position as a global payment network.
A combination of three upgrades, the Bitcoin Taproot Upgrade enhanced the privacy, efficiency, and scalability of the Bitcoin (BTC) network. It not only paved the way for fast verification of transactions and better scalability but also for the implementation of smart contracts and decentralised finance (DeFi) within the Bitcoin ecosystem.
The Bitcoin Taproot Upgrade was introduced in November 2021 and was led by Gregory Maxwell and crystallised into a Bitcoin Improvement Proposal (BIP) by Pieter Wuille. The upgrade sought to streamline transaction verification and fortify privacy.
BIP is the standard method on the Bitcoin blockchain that developers can use to propose new features and changes in the blockchain. It works similarly to the Ethereum Improvement Proposal (EIP). Whenever there is a new proposal that is appropriate, it gets published to the Bitcoin Core GitHub repository of BIPs waiting for activation.
Image: Timeline of the Bitcoin Taproot Upgrade, by Kraken Intelligence
The Taproot upgrade implemented three BIPs on the Bitcoin network:
• BIP 340 (Schnorr signatures)
• BIP 341 (Taproot upgrade)
• BIP 342 (Tapscript upgrade)
The upgrade's impact was profound: it made Bitcoin transactions more efficient, private, and secure. Moreover, it facilitated the implementation of complex smart contracts, unlocking DeFi opportunities. The upgrade activated Merklized Alternative Script Trees (MAST) and compressed complex Bitcoin transactions into a single hash, reduced transaction fees, minimised memory usage, and enhanced the network’s scalability.
The Tapscript upgrade simplified the integration of new features as it paves the way for future innovations on the Bitcoin network. It scrambled transactions with single and multiple signatures, bolstering transaction privacy and anonymity and consolidated signatures and transactions, expediting verification and reducing costs. Schnorr signatures, introduced with Taproot, fortified transaction security.
Prior to the Taproot upgrade, Bitcoin transactions used to get verified after validating a signature on an individual level against a public key. Post the Taproot upgrade, it allows for multiple signatures to be bundled and verified together instead of individually.
Thanks to the Taproot upgrade, the Bitcoin network can execute more transactions and run its operations in a fast and economical manner because the size of its blocks has increased. It also allows Bitcoin to host smart contracts on its network as the upgrade addressed the concerns of system congestion due to multiple signatories and transactions.
As Bitcoin’s scalability grows, we expect its adoption to grow among the developer community. Prior to the Taproot upgrade, Bitcoin transactions used to get verified after validating a signature on an individual level. It is important to know that before the upgrade, Bitcoin miners on the blockchain signaled their support for the upgrade with 90% consensus.
Then in November 2021, the Taproot upgrade was fully implemented as a soft fork of the Bitcoin protocol when it hit 709,632 blocks. The last big upgrade on the Bitcoin network prior to the Taproot upgrade happened when the Segregated Witness (SegWit) was activated in 2017.
The SegWit upgrade segregated a Bitcoin transaction into two sections by adding a “witness data” section that could support arbitrary data. It created the space for additional data on a transaction on the network. The Taproot upgrade was the next step towards enhancing the network efficiency of Bitcoin.
Leading Bitcoin developer, Gregory Maxwell, first proposed the Bitcoin Taproot upgrade in a paper in January 2018. Next, Pieter Wuille, Jonas Nick, and Anthony Towns authored and codified the Taproot upgrade.
Wuille is a cryptography and Bitcoin R&D expert at Chaincode Labs. Nick is a Bitcoin researcher at Blockstream. Towns is a Bitcoin Core Developer at Paradigm. The upgrade enjoyed extensive support in the mining community as it sought to implement significant improvements to the code gradually.
Before the Taproot upgrade, Bitcoin transactions lacked strong privacy features. It introduced Schnorr signatures to obscure transaction inputs, rendering participant identities indistinguishable.
Image: Schnorr Signatures, by Bitnovo
This upgrade streamlined the verification process by consolidating multiple signatures into a single batch. Consequently, it expedited transaction verification and improved network scalability.
Taproot also facilitated the proliferation of smart contracts and DeFi within the Bitcoin ecosystem. Embracing smart contracts opened doors to innovative use cases and decentralised applications (dApps).
The Taproot upgrade focuses on improving efficiency, privacy, speed, efficiency and scalability of the Bitcoin network. It makes way for multiple signatures and on-chain transactions to be bundled together. Thanks to the upgrade, Bitcoin transactions get processed simpler and faster.
It makes way for multiple signatures and on-chain transactions to be bundled and processed together. Let's discuss the primary benefits of the Taproot upgrade in detail:
• Taproot's integration of Schnorr signatures combines transaction types which in turn obscures user identities while enhancing privacy.
• This makes it challenging to trace transaction participants, fostering a more confidential transaction environment.
• This means that users can conduct transactions with increased anonymity, thereby bolstering trust and security within the Bitcoin network.
• By streamlining the verification process through the signature collection, the upgrade eases transaction validation on the Bitcoin network.
• It reduces the time and computational resources required for verifying transactions, leading to faster transaction processing.
• Bitcoin users experience smoother transaction flows and lower latency, which enhances the overall efficiency of the network.
• Optimisation of transaction verification leads to reduced fees, particularly for complex multi-signature transactions.
• This cost-saving measure makes Bitcoin transactions more accessible and affordable for users across the network.
• Lower transaction fees encourage broader adoption and usage of Bitcoin as a medium of exchange.
• The upgrade’s encouragement of smart contract implementation opens new avenues for DeFi in the Bitcoin ecosystem.
• This empowers users to execute complex financial transactions autonomously, without relying on intermediaries.
• The integration of smart contracts enhances the versatility and utility of Bitcoin, attracting developers and investors alike.
• Optimisation of transaction processing improves Bitcoin's scalability, allowing the network to handle a higher volume of transactions per block.
• This scalability enhancement ensures smoother transaction flows while reducing congestion during peak demand periods.
• Bitcoin maintains its efficiency and reliability as a scalable digital currency platform.
• Taproot's user-friendly architecture simplifies the development process for creating innovative applications and functionalities.
• This empowers developers to build upon the Bitcoin network, driving continuous growth and evolution within the ecosystem.
• The developer-friendly nature of Taproot fosters collaboration and innovation, enhancing the overall resilience and adaptability of Bitcoin.
The Taproot upgrade enhanced the scalability of the Bitcoin protocol as it made the development of smart contracts cheaper and easier, thanks to its blockchain space optimisation. Smart contracts are self-operating agreements which are built on a blockchain network and self-execute automatically when basic requirements or predefined conditions are met.
As the Taproot upgrade enhanced the scalability of the Bitcoin protocol, the development empowered the network to host smart contracts on Layer 1 (L1). Smart contracts can be built to create FinTech solutions, DeFi platforms, dApps, supply chain management channels, gaming platforms, NFTs etc. We are yet to see if the upgrade can help Bitcoin compete with the most popular smart contracts host, Ethereum (ETH).
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The Lightning Network is a layer-2 solution on the Bitcoin network, which grew popular due to its fast and scalable peer-to-peer (P2P) transactions at low transaction fees.
Image: How the Bitcoin Lightning Network works, by BitPay
The signature aggregation feature of the Taproot upgrade facilitates the on-chain settlements of the Lightning Network. The Taproot upgrade also makes way for the development of Bitcoin-based dApps and other innovative use cases. If the Lightning Network facilitates such activities, we can better assess the capabilities of the upgrade in this regard.
Bitcoin Ordinals are the equivalent of non-fungible tokens (NFTs) on the Bitcoin blockchain network. Ordinals are virtual assets that are inscribed on a satoshi, the lowest denomination of a Bitcoin. The data usually represents art such as images, music, etc. Do you know that it was the Taproot upgrade that allowed developers to create Ordinals on the Bitcoin network?
Image: The first Bitcoin Ordinal, a pixel art of a skull, created by Casey Rodarmor in December 2022
The signature aggregates, thanks to the Schnorr BIP, allow for more on-chain transactions on the Bitcoin network. The simplified scripts, thanks to the Tapscript BIP, allow for quick transactions on the network. Later, we also saw the emergence of crypto startups inspired by the Taproot upgrade such as Ordinals-focused development firms Taproot Wizards and Tap Protocol.
The trading community looks at every upgrade with excitement or panic depending on how it would affect the price movement of cryptocurrencies.
The Taproot upgrade is a much-awaited key to several of Bitcoin’s problems, especially scalability. As the network gains a wider adoption among the developer community, it will earn trust for Bitcoin. If institutional and other leading communities onboard the Bitcoin network after the Taproot upgrade, it will prove to be a gamechanger for the crypto world.
However, we understand its impact on Bitcoin’s price movement will only be short-term but the upgrade, complemented by wider adoption or a lack of it, could influence Bitcoin’s price movement even in the long-term. So, what are the main implications of the Taproot upgrade for the Bitcoin traders?
Taproot streamlines verification, reducing fees for complex transactions.
This enables quicker, more cost-effective transactions, enhancing investors' ability to capitalise on market opportunities.
It strengthens transaction privacy with Schnorr signatures and combines transactions, shielding sensitive details from unauthorised access.
This enhances investor confidence and protects financial privacy.
It unlocks DeFi possibilities by facilitating smart contract execution.
This empowers investors to explore innovative investment strategies and revenue streams.
The upgrade, scalability improves transaction throughput, ensuring seamless operation during peak demand.
Future upgrades promise further enhancements, reinforcing Bitcoin's functionality and adaptability.
The Taproot upgrade addresses Bitcoin's scalability challenges by accommodating more transactions per block. This move fortified Bitcoin's position as a global payment network which is capable of handling transactions at scale without compromising speed or cost-efficiency.
It also unlocks the potential for powerful smart contracts, positioning Bitcoin as a hub for DeFi. From automated lending to decentralised exchanges (DEXs), Taproot-enabled smart contracts pave the way for novel applications, expanding Bitcoin's utility.
The Bitcoin Taproot upgrade was a BIP that was introduced in November 2021 to enhance the privacy, efficiency, and scalability of the Bitcoin network.
Gregory Maxwell proposed the Taproot upgrade in 2018. Pieter Wuille authored the three BIPs that codified the Taproot upgrade. Other crypto developers, Tim Ruffing, A.J. Townes, and Jonas Nick also joined them to work towards implementing the upgrade.
The Taproot upgrade in fact implemented three BIPs on the Bitcoin network, viz. BIP 340 (Schnorr signatures), BIP 341 (Taproot upgrade), and BIP 342 (Tapscript upgrade). Schnorr signatures fortified transaction security; Taproot bolstered transaction privacy and anonymity; and Tapscript simplified the integration of new features.
The Taproot upgrade was required to enhance user privacy, expediate transaction verification and improve network scalability.
The SegWit upgrade minimised the Bitcoin block size and restructured how data is stored in transactions. In contrast, the Taproot upgrade introduced signature aggregation and reduced transaction data size. While the SegWit upgrade doesn’t particularly prioritise privacy, the Taproot upgrade focuses on privacy and makes transactions indistinguishable from one another.
The main benefits of the Taproot update are:
• Enhanced privacy
• Improved efficiency
• Lower transaction fees
• Support for smart contracts
• Scalability, and
• Developer-friendly infrastructure
The Taproot upgrade brings the following advantages for the trading community:
• Enhanced efficiency
• Lower transaction fees
• Improved privacy.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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