As the first cryptocurrency ever created, Bitcoin is lacking in features that some other cryptocurrencies have. The Taproot upgrade, slated to be implemented sometime in November 2021, will bring a plethora of features to Bitcoin, including lower fees, enhanced privacy, and the potential for smart contracts.
When Satoshi Nakamoto created Bitcoin in 2008, he envisioned the protocol as a “peer-to-peer digital cash.” He did not, however, predict the rise of smart contracts and decentralized finance, which has taken the world by storm and promises to be the backbone for the next generation of the internet. As a result, the Bitcoin blockchain has always been quite simple, with no features other than the storing and transferring of Bitcoin. Though this was revolutionary in 2008, there have been many developments in the past 13 years, and proponents of Bitcoin are looking to make the cryptocurrency more competitive and keep its title as the top coin in the future.
The Taproot upgrade is a series of changes that will help scale Bitcoin and bring new use cases to the network. The first of these changes is the transition in the way that transactions are confirmed. To confirm a transaction, a user must prove that they own the address that they want to use to transfer funds, and this can be proved with their private key. Using the private key, a user will sign a signature that, due to cryptography and advanced math, proves that they own the address in question, and any transfer of funds is valid. Since its release, Bitcoin has used the Elliptic Curve Digital Signature Algorithm, or the ECDSA. It was chosen due to its reliability and security, both of which are incredibly important for securing a blockchain.
However, there is a relatively new signature algorithm called Schnorr Signatures that vastly expands upon its predecessor and offers multiple benefits for users.
One of the most important benefits is that to privacy, especially with multi signature wallets. A multi signature wallet is a Bitcoin wallet that has multiple private keys and requires every private key in order to confirm a transaction. With ECDSA, the blockchain publishes the fact that a certain address has multiple private keys, which could be a security threat. On the other hand, Schnorr Signatures compile all of the private keys together such that a multi signature transaction looks no different than any other on the network, and uniformity makes individual transactions harder to trace, resulting in greater privacy. This will be useful for easier implementation of the Lightning Network, a Layer 2 scaling solution that can take advantage of some of Taproot’s technology, ultimately leading to better scaling for Bitcoin.
Schnorr Signatures are also able to be confirmed in a batch, instead of the required one by one verification of ECDSA. This means transactions will be cheaper and faster for the entire network.
Due to the reduction in computing power and uniformity of transactions, Taproot also offers the potential for smart contracts to be created on Bitcoin. It is likely that they would still be significantly more expensive than Ethereum or other smart contract platforms and be limited in functionality. Regardless, the ability for the $1 trillion worth of Bitcoin to interact with smart contracts is massive, and could help bring smart contract technology mainstream.
The upgrade is slated to take place around November 2021 and will occur through a soft fork. A soft fork means that the blockchain upgrades without any risk of a hard fork, which opens the possibility for a split to occur. In fact, this is exactly what happened last time Bitcoin had an upgrade, which was in 2017 and resulted in the creation of Bitcoin Cash. Soft forks are somewhat controversial, as noted by Vitalik Buterin, creator of Ethereum, because they force all miners to either upgrade or leave, with no option to dissent. However, they have the potential to be simpler for users, as well as removing the risk for another Bitcoin Cash fiasco. To approve the upgrade, 90% of miners had to agree, which took months to accomplish.
Even though the Bitcoin network is antiquated and simple, the Taproot upgrade demonstrates that it is possible to “teach an old dog new tricks.” It will keep Bitcoin competitive with newer cryptocurrencies, offer enhanced privacy, and bring the blockchain closer to its goal of being the world’s reserve currency.
By Lincoln Murr