Bitcoin recently implemented the most important upgrade on its network in the past four years. Coined Taproot, this upgrade aims to streamline the processing of transactions and make them more efficient in speed and cost.
The upgrade has received a consensus from a majority of stakeholders and many experts believe this could be a revolutionary moment for the world’s biggest cryptocurrency as the support from miners in accepting and bringing in this upgrade was overwhelming.
This blog is meant to give you a thorough understanding of this new upgrade and what comes with it. Let’s get right on it!
Unpacking the Taproot Upgrade
Taproot is the biggest upgrade in Bitcoin’s network after the Segregated Witness (SegWit) upgrade in July 2017, which addressed scalability issues. This upgrade introduces what’s called Schnorr signatures — which will help Bitcoin transactions become more private, efficient, and cost-efficient.
Taproot promises to improve many things for the network including privacy features and smart contract functions. These changes will lead to improved wallet functionality and reduced fees for complex transactions.
“On the first side, it is expected to bring in better privacy and transparency in transaction, and on the other side, this is the first time the smart contracts capability is being added to the bitcoin blockchain network.”
Sathvik Vishwanath, co-founder, and CEO, Unocoin
Why was This Upgrade Needed?
The Taproot upgrade for bitcoin would allow smart contracts to be run efficiently and cheaply. As of now, smart contracts are usually run on the Ethereum network because of the higher efficiency.
However, with the Taproot upgrade, Bitcoin has the potential to elevate itself and integrate with mainstream finance. Moreover, bitcoin is a public blockchain, and anyone can monitor the transactions that occur on the network, which is a cause of concern for many.
Previously, running smart contracts on bitcoin’s core protocol layer was not exactly feasible. It happened to be quite expensive and time-consuming, thereby rendering it almost useless. After the upgrade, smart contracts have proved to be one of the key selling points for Taproot.
Smart contracts can be used for almost any trivial financial transaction such as paying utility bills to pay rent, among others. With Taproot coming into the picture, multiple transactions could be done to a Bitcoin wallet, which can be hashed under one transaction and can be useful for streamlining various applications. This will likely lead to an increase in day-to-day applications for Bitcoin.
A big part of bitcoin’s makeover has to do with digital signatures, which are like the fingerprint, individual leaves on every transaction.
Previously, the cryptocurrency used something called the “Elliptic Curve Digital Signature Algorithm,” which creates a signature from the private key that controls a bitcoin wallet, and ensures that bitcoin can only be spent by the rightful owner. Here, the verification of transactions on Bitcoin’s network was slow because each digital signature was validated against a public key. This method multiplied the amount of time required for complex multi-sig transactions that require multiple inputs and signatures.
The taproot will add something known as Schnorr signatures, which essentially makes multi-signature transactions unreadable. Signature aggregation, in simple words, multiple signatures can be batched together and validated.
The benefit for multi-sig transactions — or transactions that require sign-offs from multiple parties — is even more pronounced since the upgrade condenses transactions containing many inputs, such as those from multiple addresses on Bitcoin’s network, into a single one.
As more crypto adoption happens worldwide, the need for privacy has grown. The Taproot upgrade aims to increase privacy for certain transactions.
Taproot has also introduced MAST (Merkelized Abstract Syntax Tree), which will make it more difficult to trace and analyze Bitcoin transactions. As a result of the upgrade, multi-signature transactions will now be indistinguishable from simple transactions, meaning greater anonymity and privacy for users.
It is worth noting that the Bitcoin network can handle about four to five transactions per second, and transaction fees can swell to $75 or more. As of now, we don’t know how much cheaper transactions have been after Taproot, but the upgrade promises to make the transaction fee cheaper.
Schnorr signatures used by the Taproot upgrade reduce the amount of data needed for multi-signature transactions, which are more complicated to process than standard ones. And with lesser data involved, transactions will become more time-efficient, thereby making the transactions cost-efficient.
How Will It Impact Investors?
The movement in the price of cryptocurrencies depends on the practical use cases of digital asset that are adopted by the masses. Bitcoin’s Taproot upgrade might just be the key element that would propel it into mainstream finance. Experts suggest that the kind of revolution that the Taproot upgrade might bring for Bitcoin is phenomenal.
As Bitcoin scales and becomes more efficient at processing transactions, the chances increase that it will become an effective medium for transactions. In the past, bitcoin’s worth as a store of value has been tied to its utility. Therefore, it is conceivable that bitcoin’s worth will increase as the number of useful transactions on its network increase.
The taproot will set the foundation for the next phase of innovation in the bitcoin protocol. This upgrade unleashes a new wave of innovation in bitcoin, focused mainly on smart contracts. This innovation with smart contracts in the limelight implies that Bitcoin is now a strong contender even in the DeFi sector.
Meanwhile, the Bitcoin price today is $47,358.40 with a 24-hour trading volume of $34,060,426,871. Bitcoin is down by 3.11 percent in the last 24 hours, as reported by CoinMarketCap.
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