On November 14, at 04:10 UTC, Bitcoin received a critical network update known as the Taproot Upgrade. This is the network’s first significant upgrade after the Segregated Witness (SegWit). The SegWit update led to the creation and deployment of the Lightning Network in 2018.
Gregory Maxwell, a Bitcoin core member and former Blockstream chief training officer suggested the Taproot upgrade on January 23, 2018. While the SegWit update aimed to address transaction malleability and improve the scalability of the Bitcoin network, the current Taproot upgrade intends to improve transaction efficiency, network privacy and adds improved support for smart contract capabilities.
This upgrade was implemented on June 12, 2021, after achieving 90 percent unanimity among all Bitcoin mining nodes. Hampus Sjöberg, another core Bitcoin developer, declared this consensus. Soon after, Sjöberg launched the Taproot.watch website, which kept the community up to date on the chronology leading up to the upgrade and housed any pertinent information about the change.
All Bitcoin tokens are stored in the form of scripts, which are a few lines of code that determine how the token can be used in the following transaction. The “spending criteria” typically mean delivering a signature as confirmation of token ownership.
There are, however, alternative constraints, such as timelocks or mutilsig. To create complicated smart contracts, several sorts of circumstances can be mixed and matched. Whichever of the conditions is met first determines how the token will be spent.
Prior to the upgrade, the network employed the pay to script hash (P2SH), which implies that just the script’s hash was initially included on the blockchain. As a result, when the tokens are spent, the network makes it mandatory to publish all conceivable conditions that could’ve been met, even if they weren’t met in that particular transaction.
The negative is that it is particularly data-heavy because it results in the storage of a large amount of unneeded data on the blockchain. Furthermore, there are privacy problems because any member on the blockchain network can probe into the transaction to determine how the cash could be spent, the type of wallet being used, and possibly other facts that the individuals involved in the transaction may not want to expose.
MAST and Schnorr Signatures are two new features that have been introduced
The Taproot upgrade added the Merkerlized Abstract Syntax Tree (MAST), which offers a condition that allows the transaction’s sender and recipient to sign off on a transaction in tandem for settlement. Merkle Trees serve as the foundation for this construction. Ralph Merkle, one of the initial investors in public-key cryptography, devised these established complicated data structures that are compact.
The use of these trees in the Bitcoin Network ensures that the many situations under which funds could be spent are hashed individually and incorporated in the tree, resulting in a Merkle root, a single hash for the transaction. This means that only criteria that are met must be revealed to the network, making it more data-efficient than the prior contract interaction, i.e., P2SH.
The version also includes the Schnorr Signature, a method that allows users to combine many signatures into one for execution in a single transaction. This makes it far more difficult for any investigator to distinguish between conventional transactions and multisig transactions. Essentially, the signature hides the fact that a MAST structure was used in the transaction at any point.
Johnny Lyu, the CEO of Kucoin, a renowned cryptocurrency exchange, spoke with Bitcoinist about the network’s impact from this upgrade. “I believe the influence on Bitcoin utility and consumers may be portrayed in three different ways,” he stated. And we may have to wait a little longer for its full influence to be revealed.”
The first aspect, according to Lyu, is to create better smart contracts. Despite the fact that the Bitcoin network has previously built smart contracts, it frequently results in less efficient transactions and larger data sizes. However, the improvement that allows several transactions to be hashed under one will aid in the streamlining of numerous applications and enhance overall transactional performance.
Lyu mentioned the following points about the remaining aspects:
“The second side is that with faster transaction speeds and smaller data sizes, a lower transaction cost on the Bitcoin network might be predicted.” The third benefit to users will be improved privacy protection. The SSA bundling technique will make it more difficult to track individual transactions, increasing bitcoin senders’ privacy protection.”
However, while this upgrade focuses on network efficiency, it is also critical to assess the impact of the upgrade on network users. Bitcoinist spoke with Antoni Trenchev, Co-Managing Partner of Nexo, a cryptocurrency trading platform, about what network users might expect after the upgrade.
“On a purely “user” level, many will not feel the difference after this significant improvement because the wallets they use will accomplish all the magic for them,” he said. What customers will see is that their transaction fees have been reduced by about 10%.”
Because Taproot is the first substantial improvement to the network in almost four years, it is probable that it will have an immediate impact on the pricing. However, market speculation suggests that because this update has been a long time coming, it has already been incorporated into the current price of BTC, which is now trading in the $64,800 range. Trenchev stated the following:
“This is a behavior we’ll start seeing more of in crypto; investors will start tracking and comprehending significant network upgrades on a deeper level.” This will naturally lead to earlier pricing in response to such news, but I doubt the present Taproot upgrade has been fully factored in. There is always the possibility of a price increase surrounding the next upgrade itself, as it is one thing to read about future progress and another to see its successful execution and outcomes.”
Lyu concurred with Trenchev on this important point, saying, “I think that in the long run, the Taproot upgrade will have a certain impact on Bitcoin pricing, and I don’t exactly agree with the assumption that it’s already priced in.” We can see that the price of bitcoin has more than doubled since 2021, and I believe that the main drivers are the influx of institutions and old money, rather than the growth of bitcoin technology.”
Lyu went on to say that there is always a delay in the impact of technological improvements, as shown with the previous upgrade, SegWit, whose pricing impact was visible barely a week after it was implemented on the network. As a result, while the price impact of the update may be small in the short term, the long-term benefits of this upgrade are enormous due to considerable increases in network efficiency and security.
The Lightning Network Might Get Boosted
The Taproot upgrade may potentially assist the Lightning Network. The network was launched to address the Bitcoin network’s scalability issue, with the goal of relieving congestion on the Bitcoin network via layer-2 solutions.
Trenchev stated that the upgrade would make the Lightning Network more appealing to developers by providing them with more fertile ground to implement scalable enhancements and layer-2 network solutions.
“Taproot’s true power is really a behind-the-scenes ordeal,” he noted. That being said, Bitcoin and blockchain, in general, are primarily powered by developer power; this is our space’s core strength, therefore Taproot is unquestionably a force with enormous future potential.”
Through Strike, one of the most popular Lightning Network wallets, the Lightning Network played a major role in El Salvador’s recognition of Bitcoin as legal cash. The number of Lightning network nodes increased from 10,000 to 23,000 in the 90 days between May and July of this year. The network’s current projection is that it will reach 700 million users by 2030.
Lyu, on the other hand, is suspicious of the network because it has yet to gain widespread adoption and is contentious in two ways. He stated:
“First, some people believe that Lightning Network is transforming bitcoin into a global payment network like Visa or Mastercard, which is contrary to bitcoin’s original intent; second, the current processing power of the bitcoin network is capable of handling the existing transaction volume, and Lightning Network is not required.” As a result, I believe it must provide a better answer if it is to be extensively used in the future.”
Furthermore, the Taproot upgrade increases the deployment and efficiency of the Bitcoin network’s smart contract capability. However, it may be unrealistic to assume the same level of smart contract functionality as shown in other smart contract blockchain networks such as Ethereum, Binance Smart Chain (BSC), Solana, and others.
Trenchev stated that, while Taproot is the first step in this direction, there is still a long way to go before this becomes a commonly used application. He stated, ”
“Bitcoin is currently the type of network that is an exceedingly successful one-trick pony – it performs its function exceptionally well.” Ethereum, on the other hand, was designed from the start with numerous use cases in mind, although it takes time to iron out any kinks. These distinctions are precisely why Nexo wants to encourage a multi-chain future; it is what will lead to a scalable, practical, and idea-rich industry.”
However, the objective of smart contracts on the Bitcoin network may not even be to scale decentralized apps (dApps) or other smart contract services. Trenchev made a parallel to Ethereum, stating that more advanced smart contracts on Bitcoin could potentially be detrimental to the network. He stated:
“However, Bitcoin is now capable of deploying smart contracts following the upgrade.” The goal of implementing smart contracts is to improve the efficiency and flexibility of the Bitcoin payment function rather than to support Dapps. As a result, deploying the same size of smart contracts on Bitcoin as on Ethereum may be impossible, and it is also risky for the bitcoin network in terms of network security and speed. It will severely undermine bitcoin’s basic purpose as a digital payment system.”
Regardless of the increasing similarities with Bitcoin smart contract platforms, it is apparent that the Taproot version introduces a slew of useful capabilities that both developers and users will like. Although the price of BTC did not change significantly in the immediate aftermath of the upgrade, it is apparent that the long-term pricing impact of Taproot will be enormous since it boosts network efficiency as a whole, one of the most essential factors of any blockchain network’s utilization.
