What is the Bitcoin Taproot Upgrade and Why It Matters?
Change is the only constant and when Bitcoin (BTC) was launched by Satoshi Nakamoto shortly after the 2008 financial crisis, it was the birth of perhaps the most significant change in the global financial fibre for years to come. However, despite its near-perfect technical architecture, bitcoin needs to continually evolve with changing times to remain competitive in a world that is getting increasingly pervasive in all facets of life.
To date, the Bitcoin network has undergone several significant changes aimed toward better performance, efficiency and transferability. The latest of these significant upgrades is the Taproot upgrade which is supposed to go fully live in November this year.
In this guide, we will delve deep into all the finer intricacies associated with Bitcoin’s Taproot upgrade. What does the upgrade do, why is it necessary, and perhaps the most important question for Bitcoin traders: will the upgrade reflect in BTC’s price?
History of Major Bitcoin Upgrades
Before we discuss the Taproot upgrade, it is important we first understand the history of major protocol-level upgrades brought to the Bitcoin network. This will give us an idea of how the Bitcoin network as we know it today came to be.
To understand Bitcoin upgrades, one should know what a hard fork means in the blockchain industry. Put simply, a hard fork, or in this case, a Bitcoin hard fork refers to a significant change in the Bitcoin blockchain protocol that essentially leads to the creation of two branches or off-shoots of the original network. These two off-shoots consist of one network that follows the previous protocol and the other one that follows the new version of the protocol. Think of a hard fork as a divider that cuts down a river into two separate streams.
To date, a number of important Bitcoin upgrades — or hard forks – have taken place. However, it is worthy of highlighting that not ‘upgrades’ as such can be dubbed for Bitcoin as we will learn in the following part.
Perhaps the first major upgrade to the Bitcoin protocol since its inception, the Bitcoin XT upgrade was initiated by Bitcoin Core developer Mike Hearn in 2014 with an aim to increase the network transaction speed. Essentially, Hearn wanted to make Bitcoin more scalable and to that effect he introduced several speed-enhancing features in front of the Bitcoin community without compromising on the network efficiency or decentralization. In terms of exact performance enhancement, the change seeked to increase the number of transactions from the erstwhile 7 transactions per second to up to 24 transactions per second.
To that effect, Hearn proposed that Bitcoin XT’s block size be increased from the previous 1MB to 8MB. While this fork received some initial traction at the beginning, it quickly ran out of favour among other Bitcoin developers who were concerned about the level of increase in block size. The reason? We will know that soon.
The Bitcoin Cash hard fork is perhaps the most discussed upon and controversial hard fork witnessed by the Bitcoin network to date. The roots of the Bitcoin Cash hard fork can be traced back to when the SegWit upgrade was proposed. A section of the Bitcoin community at the time vehemently opposed the SegWit upgrade and came up with a proposal that is now known the world over as Bitcoin Cash.
Among other features, the Bitcoin Cash proposal aimed to increase the Bitcoin network block size to 8MB. In addition, the transaction speed was also increased to 60 transactions per second in contrast to Bitcoin network’s 7 transactions per second. While at the surface the Bitcoin Cash hard fork might seem like a beneficial proposal, it vastly compromised the decentralized nature of the Bitcoin network.
Today, Bitcoin Cash (BCH) ranks among the top cryptocurrencies in the world with a market cap of more than $12 billion and is led by Roger Ver, known as the ‘Bitcoin Jesus’ in the crypto circles.
With the continual upgrades and reiterations of the Bitcoin network as it grew in stature, a section of the Bitcoin community started to criticize the network on account of it becoming too centralized for its own good. This was because as Bitcoin rose in price, a larger number of BTC miners flocked toward the Bitcoin mining space, which, in turn, made the mining market more competitive and necessitated the use of sophisticated Bitcoin mining machines to be able to profitably mine the leading cryptocurrency.
The complex nature of Bitcoin mining puts the individual Bitcoin miners with their CPUs and GPUs out of competition. Against this backdrop, in 2017 a group of Bitcoin Core developers forked out Bitcoin Gold from the Bitcoin network in hopes of getting the BTC ecosystem back to its original mining infrastructure. In addition, Bitcoin Gold also greatly reduced the time it took to confirm transactions (2.5 minutes Vs. 10 minutes on the Bitcoin network).
Now that we have discussed the major hard forks experienced by the Bitcoin network to date, let us quickly discuss why these hard forks, or in common parlance, upgrades are so necessary.
Why Are Bitcoin Upgrades Necessary?
As you might have known by now, any upgrade proposed for the Bitcoin network is primarily geared toward bringing performance efficiency to the underlying blockchain network, be it in terms of speed, scalability, decentralization, or transaction throughput.
Being the first of its kind and perhaps the most famous application of blockchain technology to date, it is not only important but essential for Bitcoin to continue to upgrade itself with the changing times.
As we read in the previous section, the large majority of BIPs were aimed toward bringing some degree of performance efficiency to the Bitcoin network while some of them were also motivated by monetary gains and in attempts to take over the control of the Bitcoin network and make it more centralized. While Bitcoin upgrades can temporarily make things a little complicated for the entire crypto ecosystem, it must be noted that the aim of these upgrades is to ultimately benefit the Bitcoin ecosystem at large.
Furthermore, continual upgrades on the Bitcoin network also give opportunities to Bitcoin-based projects such as RSK to be able to develop more innovative and robust Bitcoin applications through its smart contracts. RSK already boasts of a thriving Bitcoin ecosystem where it leverages its smart contracts secured by the Bitcoin blockchain for innovative purposes such as enabling decentralized finance (DeFi), creating revenue-generating protocols, enabling token swaps between the Bitcoin and Ethereum ecosystem and much more. In that regard, we will now discuss the implications of the latest Bitcoin upgrade: Taproot.
In the following few sections, we will dive deep into the technical prowess of the Taproot upgrade, what it brings to the table for the wider Bitcoin community, the people behind the upgrade and more.
What Is the Bitcoin Taproot Upgrade?
Apart from the wide range of benefits that the Taproot upgrade promises, it is important to realize that the upgrade in itself is a throwback to what Satoshi Nakamoto’s Bitcoin initially aspired to be. This is not to say that BTC has run astray from its long-term vision but the kind of advantages that Taproot offers remind us of the genesis of the Bitcoin network. Before we dig deeper into the pros of the upgrade, let us first understand what exactly the upgrade is all about.
At its core, the Taproot upgrade has largely to do with preserving privacy of Bitcoin holders, making transactions cheaper and fostering the growth of smart contracts application and DeFi on the Bitcoin network.
If you ever read the Bitcoin whitepaper authored by Satoshi Nakamoto, you will remember that Bitcoin is supposed to be a purely peer-to-peer digital cash system over a trustless network that does not require both the recipient and the sender of BTC to know each other. Just sharing the destination Bitcoin wallet address is more than enough for someone to transact BTC with someone else. However, due to the rapid rise of KYC crypto exchanges and technological advancement in terms of on-chain analysis, privacy when it comes to a public ledger cryptocurrency such as Bitcoin has taken a back seat.
Here, however, we are not talking about user privacy to make anonymous Bitcoin on-chain transactions. Instead, the word privacy here means mitigating the difference between complex Bitcoin transactions that require multiple signatures and simple peer-to-peer Bitcoin transactions. Specifically, with Taproot in place, every Bitcoin holder will move to Schnorr signatures that will render multi-signature transactions unreadable. Taproot will do this by combining the public keys of the users participating in a smart contract and create an entirely new public key. This newly created public key will then be able to create a unique signature which is only possible for that specific combination of Bitcoin wallet addresses.
In simpler terms, with Taproot in place, different spending conditions may look identical which means it would display less information about users and also improve efficiency.
Unparalleled Support From Bitcoin Miners
Before we jump into the ideation part of the Taproot upgrade, it is worth noting that unlike the large majority of previous Bitcoin network upgrades which were very contentious, the Taproot upgrade has enjoyed near unanimous support from all Bitcoin miners.
The Taproot upgrade is scheduled to go live in November 2021 assuming nothing significant happens to derail the upgrade. The earliest indications of Bitcoin miners supporting the Taproot upgrade surfaced on June 12 when major Bitcoin mining pool Slush Pool mined block number 687,285 with the transaction including a signal for Taproot upgrade activation. Notably, the block mined by Slush Pool was the 1,816th block to include a signal for Taproot activation by a Bitcoin miner within the mining difficulty epoch that lasted from May 30 to June 13.
For the uninitiated, a total of 2,016 blocks are created every difficulty period for the Bitcoin network. Therefore, getting past block number 1,816 with a Taproot activation signal meant that the required 90% threshold for initiating the upgrade was reached without much effort. In addition to Slush Pool, other Bitcoin mining giants such as AntPool and F2Pool — ranked first and second largest BTC miners in terms of hash rate distribution, respectively — also showed their support for the upgrade fairly early on.
In simple terms, this means that Bitcoin’s first major upgrade in 4 years, Taproot, has finally been given the greenlight from all major BTC mining pools and would be expected to activate in mid-November.
The above figures might beg the question that why only the 90% threshold is required? Why not simply anything more than 50% as that would mean majority too? Well, the answer lies in the fact that Bitcoin today is close to being a trillion dollar asset class and as such involves various stakeholders that include miners, institutions and individual holders. Therefore, for any significant change to take place, there must be a broad buy-in or support for the same. Ultimately, a proposal for adoption called ‘Speedy Trial’ was embraced which gave all miners a three-month notice to signal with a 90% threshold required for Taproot’s activation.
Whose Idea Was the Taproot Upgrade?
For those not in the know, the Taproot upgrade was proposed by Bitcoin Core developer Gregory Maxwell in 2018. Bitcoin Core is an open-source software created by Blockstream that works towards ensuring the Bitcoin protocol is functioning well and is not being compromised in terms of security. Previously a CTO at Bitcoin Core, Maxwell proposed the upgrade in January 2018 in a blog post where he made a case for introducing transaction privacy to the Bitcoin protocol without compromising on its decentralization or any other security facet.
While the proposal was introduced in 2018, it continued to gain traction within the wider Bitcoin community and will finally see the light of light in November 2021 when the Bitcoin network finally activates the privacy-preserving upgrade.
Who is Backing the Taproot Upgrade?
As mentioned earlier, all the major BTC mining pools are backing the Taproot upgrade and, to date, no significant entity or stakeholder has voiced its disapproval towards the upgrade. In addition to the miners, several top cryptocurrency exchange platforms are also expected to publicly announce their support for the highly-awaited upgrade in November 2021. The wider Bitcoin community has also expressed a largely favourable stance toward the Taproot upgrade unlike the previous few major upgrades such as the one that led to the creation of Bitcoin Cash where the Bitcoin community was largely divided.
What Are the Benefits of the Taproot Upgrade?
Now that we have talked at length about what Taproot is, who are its backers and why it matters, it is time to learn at length about the wide variety of benefits the Taproot upgrades brings to the Bitcoin network.
By now you must already know that Taproot promises to bring better privacy features to Bitcoin which perhaps makes it the most significant privacy-centric BIP to date. Taproot will essentially make complex Bitcoin transactions that require multiple signatures or transactions with delayed release the same as simple P2P Bitcoin transactions. There will literally be no factor or denominator through which one can distinguish between the two different types of transactions via on-chain analytics.
These privacy-enhancing benefits will extend to applications that use time-locked contracts. In addition, and maybe more importantly, the privacy-preserving benefits will also benefit the Lightning Network. The second-layer network that collates Bitcoin transactions together and stores them off-chain, will become more private due to the Taproot upgrade.
Improving the Smart Contract Economy on Bitcoin
The above mentioned privacy benefits will also open doors for making Bitcoin even better as an avenue for fiddling with smart contracts. Today, leading Bitcoin-based smart contract platform RSK is already catalyzing a flourishing smart contract economy secured by the Bitcoin network. However, the activation of the Taproot upgrade will make it even easier to work with smart contracts on Bitcoin as it will leave more block space occupied by transaction data on the Bitcoin blockchain.
As the Taproot will vastly reduce the latency associated with transaction throughput on Bitcoin by compressing the data size associated with multisig transactions, it will leave more room to foster smart contract transactions on Bitcoin.
It won’t be a stretch to say that in the mid to long term, the world will likely witness a smart contract-driven economy on the Bitcoin network courtesy of projects like RSK and the Taproot upgrade. Several use-cases can be materialized via smart contracts on Bitcoin such as enabling inheritance and delegation in company spendings, recurring-purchases, lending and borrowing and much more. The best part about all of this is with Taproot implemented, no one will even be able to notice any smart contract activity by looking at the Bitcoin blockchain.
As the data size of sophisticated Bitcoin transactions will be vastly mitigated, so will the transaction costs associated with it. This essentially means that the Taproot upgrade will lead to a considerable fall in transaction fees associated with transferring or spending BTC on the Bitcoin network.
While transaction fees on Bitcoin are far from being overwhelming such as those on Ethereum, they might sometimes still have a considerable cost when the network is witnessing traffic. At the time of writing, the Bitcoin Average Transaction Fee sits at a minuscule $2+ USD. However, once the Taproot upgrade is in place, it is expected the transaction fees might go even lower around a single dollar.
To add to the aforementioned benefits, a lesser known benefit along with Taproot implementation is the fact that it will ensure that transaction signatures are no longer malleable which, until now, has been a major point of concern for Bitcoin network’s security.
For the uninitiated, the presence of a malleable signature means that it is technically possible to change the signature of a transaction before it gets confirmed. This obviously poses a great threat to Bitcoin’s security in that any synchronized attack by a group of expert hackers would make it appear as if the said transaction never occurred. Consequently, this would expose Bitcoin to the double-spending problem as was initially addressed by Satoshi Nakamoto in the Bitcoin white paper.
With the Taproot upgrade in place, however, people would no longer have to worry about any such attack as it would be impossible to orchestrate a double-spending attack with transaction signatures that are no longer malleable.
Summarizing, the Taproot upgrade is not so much about the technological prowess of Bitcoin as much as it is about the fact that Bitcoin is a community-driven idea and at the end of the day, only its community should have the power over it. The Taproot upgrade is a reminder to the grassroot level work that was put into Bitcoin by Satoshi Nakamoto, Hal Finney and all the other developers to keep the network decentralized, efficient, private and away from the whims of the large corporations.
Taproot is yet another addition to Bitcoin’s growing stack of utilities and aims to make the protocol more resilient than ever. Should the implementation go as smoothly as expected in November this year, the world will witness a stronger Bitcoin with better privacy, scalability, security and more. The effects of the upgrade will also be felt in the Lightning Network which has been a major force driving Bitcoin’s mainstream adoption and its use as a medium of exchange with near instant transaction speed.
The world will be watching Bitcoin closely this November and with a better Bitcoin in place, expect RSK to further expand its suite of Bitcoin-based products to make a difference and long-lasting value for the world.