From the beginning, efficiency and scalability were the two major issues raised over the Bitcoin blockchain network. ‘SegWit,’ also known as “Segregated Witness,” is a soft fork utilized in the Bitcoin blockchain to increase the number of transactions that can occur simultaneously. This update was referred to as the Civil War since there were many issues regarding the most legitimate way of implementing a protocol change for the blockchain. Stemming from this, developers understood the need for a significant change and enhancement in the protocol after SegWit. The ‘Taproot’ upgrade was first initiated in 2021 as a soft fork. Users across the Bitcoin blockchain network were notified of the serious changes in network protocol. The upgrade had three significant impacts on users and the network. 1
Enhanced Privacy with Taproot: how does it work?
This upgrade consists of several enhancements to improve privacy and security. The Elliptic Curve Digital Signature Algorithm (ECDSA) is used in cryptography as an encryption algorithm. ECDSA was the sole foundation of network privacy until Taproot incorporated the Schnorr signature scheme. Known for its simplicity and efficiency, Schnorr generates short digital signatures.2 Digital signatures are essential for verifying the integrity of digital messages.
Simply put, it provides reassurance that a certain message was delivered by one user and has not been changed during the process of transmission.
Satoshi Nakamoto identifies the significance of digital signatures in Bitcoin, stating, “We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership”. 3
Benefits of the Schnorr signature Scheme;
- Rebuilding on ECDSA, Schnorr provides higher efficiency.
- Creates faster verification times.
- Enabling multiple stakeholder parties to create a signature for their public keys.
The aggregation of keys can reduce transaction fees, as this only takes up the same amount of space in a block as a single-party transaction.2 This scheme was activated in block 709,632 in November 2021.
Smart Contract Capabilities with Taproot
Smart Contracts are simple programs that are incorporated into the blockchain and automatically run when pre-determined conditions are met. These are used for two basic purposes:
- To generate the outcome of an agreement automatically when the required conditions are met without any third-party involvement or time loss.
- To continue the workflow when the conditions for the previous contract are met4.
For instance, processing a payment to a required party is executed through a system when the predetermined conditions are met. A smart contract can include several stipulations to successfully execute actions. Taproot Upgrade was an advocate of smart contracts. The upgrade will expand the types of transactions that are possible on the Bitcoin blockchain, further increasing the efficiency of the network5 Bitcoin DeFi transactions would be more easily implemented using smart contracts.
Impact on Scalability and Transaction Cost
Taproot enables smooth transaction processing, which creates a much more efficient way of confirming transactions on the Bitcoin network. Stemming from the SegWit upgrade, Taproot also increases the number of transactions that can be processed simultaneously on the network.
The lightning network was designed to enable users to conduct transactions off-chain without waiting for confirmation from the blockchain6. The channel allows an unlimited number of transactions between two users without having block confirmation on the blockchain. Utilizing the lightning network and upgraded features from Taproot reduced transaction fees by a notable margin.
Risks and Concerns Surrounding Taproot Upgrade
Critics of the Taproot upgrade don’t seem to hold back on certain issues regarding the protocol change. They argue that the Bitcoin network is not as decentralized as it would seem through the Taproot upgrade. Furthermore, the Taproot upgrade increases the rate of accountability that each network user bears for coins that have been laundered.
There is a significant risk that a user’s legitimate Bitcoin will come into contact with illegal ones due to the surge in ransomware attacks on the digital currency network. The critics show that the upgrade created more possibilities for illegal bitcoins to be linked to legitimate coins, which could potentially put users at significant risk7
The Future of Bitcoin with the Taproot Upgrade
The goal of the Bitcoin network is to create an environment where BTC will be a legally enforced digital currency that can be used for day-to-day transactions worldwide.
The launch of Taproot enabled users to keep their anonymity while enhancing scalability. The Schnorr signature scheme created a process that can verify the truthfulness of transactions between users. Proponents argue that this has reduced fraudulent transactions from processing within the network 8. Overall, the upgrade has streamlined transactions on the Bitcoin network, enabling users to easily conduct business and embrace emerging technologies.
- MakeUseOf: www.makeuseof.com[↩]
- Investopedia: www.investopedia.com[↩][↩]
- Bitcoin whitepaper: https://bitcoin.org/bitcoin.pdf[↩]
- IBM: www.ibm.com[↩]
- IBM: www.ibm.com[↩]
- Medium: www.medium.com[↩]
- Coingeek: www.coingeek.com[↩]
- Trust Machines: www.trustmachines.com[↩]
