Bitcoin (BTCUSD) recently implemented the most important upgrade on its network in the past four years. Termed Taproot, the upgrade is meant to streamline the processing of transactions and make them more efficient in speed and cost. The last change to the cryptocurrency's network ended in a "civil war" of sorts and resulted in the creation of bitcoin cash (BCSHUSD), a new cryptocurrency. However, the Taproot upgrade is not a contentious one.
Here is a brief primer on Bitcoin's latest upgrade.
- Taproot, Bitcoin's latest upgrade, is its most significant one in four years.
- The Taproot upgrade batches multiple signatures and transactions together, making it easier and faster to verify transactions on Bitcoin's network.
- It also scrambles transactions with single and multiple signatures together and makes it more difficult to identify transaction inputs on Bitcoin's blockchain.
- Taproot could help scale the number of transactions occurring on Bitcoin's network.
What Does the Taproot Upgrade Do?
Quite simply, the Taproot upgrade batches multiple signatures and transactions together. Digital signatures are required on Bitcoin's network to verify transactions. They are generated using private keys and are validated against public keys.
Before Taproot's implementation, 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 implementation enables signature aggregation. In simple words, this means that multiple signatures can be batched together and validated. The benefit for multi-sig transactions—or transactions that require signoffs 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.
The Taproot upgrade also combines single-sig and multi-sig transactions into a single verification process. The upgrade also has implications for privacy because it makes it difficult to distinguish between single-signature and multi-signature transactions. Therefore, it will become more difficult to distinguish the participants of a transaction on Bitcoin's public blockchain.
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems for maintaining a secure and decentralized record of transactions.
How Does Taproot Enable Signature Aggregation?
Bitcoin already uses Elliptic Curve Digital Signature Algorithm (ECDSA) to generate keys and verify transactions. The Taproot upgrade incorporates Schnorr signatures, which are more secure and simple to implement.
One of the properties of Schnorr signatures is linearity. In simple words, this property enables you to use a sum of public keys to sign a sum of signatures. Thus, multiple Bitcoin transactions can be verified quickly in batches instead of being evaluated a single transaction at a time.
What Does the Taproot Implementation Mean for Bitcoin's Network?
As mentioned earlier, the Taproot upgrade streamlines transaction processing, making it easier and faster to confirm transactions on Bitcoin's network. It also increases the number of transactions that can be processed and decreases the overall cost of transactions on the network because the size of transactions increases.
One could argue that the presence of a Layer 2 technology like the Lightning Network is designed to accomplish the same thing. However, transactions that occur on Layer 2 channels still need to be verified on Bitcoin's network, once a channel is closed. Such batches of unconfirmed transactions can congest Bitcoin's network when they are passed on for confirmation. Implementation of the Taproot upgrade could make Bitcoin's network more efficient at processing these transactions.
The Taproot upgrade is also good for privacy because it makes it difficult to identify participants in a transaction on Bitcoin's public blockchain by disguising multi-signature transactions as single-signature transactions.
Finally, the implementation of Taproot is also a win for smart contracts on Bitcoin's blockchain. It could open the door to more innovative financial applications on Bitcoin's network. According to some, the Taproot upgrade also means that Bitcoin could become a player in Decentralized Finance (DeFi). Although the cryptocurrency's blockchain has always possessed smart contract capability, it has never been utilized to its full potential due to the problems associated with the scaling of transactions. The Taproot implementation solves that problem.
How Does the Taproot Implementation Affect Bitcoin the Cryptocurrency?
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.
When Bitcoin reaches its presumed limit of 21 million, revenue from rewards for bitcoin mining will decrease for miners. At that time, transaction fees will constitute a bulk of their revenues. The current upgrade helps bring that reality closer by shortening transaction sizes and increasing the speed with which they are processed on Bitcoin's network.