The past week wasn’t particularly pleasurable for Bitcoin investors as its price dropped by almost 10 percent. However, fans and users of the Bitcoin network were happy to find that the asset had successfully gone through its Taproot hard fork.
The Taproot update was the first upgrade to happen to the Bitcoin network in years. But, what is it, and what does it mean?
While cryptocurrencies have been heralded as the future of money, they aren’t perfect. The past few years have seen more people use digital assets for different purposes, and an increase in adoption means that cryptocurrencies now have to be dynamic in how they work. For Bitcoin, the biggest needs have been speed and privacy.
The Taproot upgrade, which went live on November 14, looks to bring some improvements to the Bitcoin network from a speed and privacy perspective.
Speed and Privacy Improvements
One of the biggest changes that Taproot brings is the batching of multiple transactions and digital signatures. These signatures are like the physical ones you leave when you conduct transactions through any of the channels you’re used to. They are required for transaction verification on the Bitcoin network, and they are generated using users’ wallets.
Before Taproot, transaction verification on the Bitcoin blockchain was slow due to the need to validate each digital signature. Each signature would need to be checked one by one to ensure that fraudulent transactions were kept at bay. But, Taproot brings the possibility of combining signatures.
Essentially. Taproot ensures that multiple signatures can be batched and verified at once. This is especially important for multi-sig transactions, which are transactions that will need multiple parties to sign off before they go through. Taproot ensures that transactions containing many inputs are condensed into just one.
Taproot can also combine multi-sig transactions with single-signature ones, ensuring that verification can be faster. The upgrade also has significant privacy implications as trackers would now find it more difficult to distinguish between multi-sig and single-sig transactions. This means that Bitcoin’s public blockchain will have even more obscure lines of distinction between the participants in a transaction.
It is worth noting that Taproot also adds Schnorr signatures to the Bitcoin blockchain. This feature makes it incredibly difficult to read multi-sig transactions, increasing their privacy on the chain. While this doesn’t mean that individual Bitcoin addresses on the Bitcoin blockchain will be more anonymous, it makes simple transactions nearly identical to the more complex ones. So, your keys won’t be as exposed as they used to be on the blockchain - a boost for transaction privacy across the board.
Expanding Smart Contract Functionality
Another important feature that Taproot brings is related to smart contracts - self-executing contracts that make blockchains so useful. Smart contracts can be used for any transaction, making them a must-have for any blockchain that hopes to survive today.
Taproot will reduce the size of smart contracts on the Bitcoin blockchain while also reducing the cost of creating them. While the Bitcoin blockchain supports smart contracts, the introduction of layer-two protocols like the Lightning Network has made it even cheaper for people to create smart contracts. Plus, Lightning Network contracts are much faster than those on the core Bitcoin layer.
With better support for smart contracts, developers should feel more confident about building on the Bitcoin network. This should make Bitcoin a bigger player in fields like decentralized finance (DeFi) and much more.
Time for Ethereum to Be Worried?
The optimization of smart contracts on the Bitcoin blockchain has been an important issue for many. With Ethereum currently experiencing scalability issues due to an influx of users, many other chains have grown their smart contract functionality with the hope of competing against it. However, none has been able to quite dethrone Ethereum.
In July, Square CEO Jack Dorsey announced that the company would work on building an environment where the Bitcoin blockchain becomes more functional for developers. Dorsey explained that the company’s new division will build an open developer platform, allowing people to create decentralized financial services on the Bitcoin blockchain.
Mike Brock, a top developer who helped integrate Bitcoin features into Square’s highly successful Cash App division, will lead the team. If successful, they could increase competition for the Ethereum blockchain significantly.
With Taproot, it has become obvious that blockchains will need to continue getting better if they hope to survive. Bitcoin has always been the most popular and most valuable cryptocurrency, but it won’t be able to hold on to that title for long if its blockchain doesn't get more useful. We’re already seeing rumors of Ether eventually becoming more valuable than Bitcoin. Developers will love to see how Taproot - and subsequent upgrades - can grow the Bitcoin blockchain’s functionality for developers.