Crypto Investing
22 Dec 2021

What is Bitcoin Taproot Upgrade? How will it Affect Price?

Deepan Datta

Bitcoin has just upgraded itself, and it happened without a fuss. Remember the last time when Bitcoin protocol was upgraded in 2017 to activate the Segregated Witness? Some Bitcoin developers who were unhappy with the upgrade initiated a hard fork to avoid the protocol upgrade resulting in the creation of Bitcoin Cash. And the rest is history. 

So, what happened this time, and how the Bitcoin Taproot upgrade will improve the crypto adoption rate. Let’s have a detailed look at the topic. 

What is Bitcoin Taproot Upgrade? 

If you have been following the cryptocurrency market closely, you would be aware that every blockchain encounter’s three distinct issues- Scalability, Privacy, and Security. And Bitcoin’s blockchain is no different. 

The latest Taproot upgrade is in the same direction to make Bitcoin more scalable, secure, and anonymous. It achieves its purpose by implementing three protocol updates encompassing the Taproot upgrade (BIP- 340, 341, 342).

To understand Taproot easily, first, you need to know how bitcoin transactions are processed.

How is Bitcoin Transaction Processed? 

In a bitcoin transaction, wallets form an integral part of the entire transactional process. 

A wallet consists of a unique cryptographic key pair- a public key and a private key. The public key functions as an account address, using which one can send and receive bitcoins. And the private key acts as an authenticator of the transaction, just like OTPs. Therefore, when sending a transaction, a cryptographic signature derived from the private key is verified while processing the transaction and stored in the chain. It’s a simple, straightforward process. 

But, when transactions happen through a multi-sig wallet, all stakeholders have to include their public key and cryptographic signature to make the transaction happen. It requires greater computational power to verify the transactions and more space to store the signature data in the blocks. This clogs the network and affects the scalability of the blockchain.

How Bitcoin Taproot Solves the Issue?

To improve the scalability in Bitcoin, developers have introduced Schnorr signatures (BIP- 341), replacing the earlier used ECDSA signatures. These are technically heavy terms, so without going too deep, let’s understand how it works simply. 

In the ECDSA signatures, miners had to verify each cryptographic signature before adding the transaction to the block. And, when a transaction involves spending from a multi-sig wallet, it requires more computing power as the miner has to verify each public key and cryptographic signature. Also, ECDSA signatures take more block space. 

In the Schnorr signature, the protocol combines all the public keys and cryptographic signatures into one, especially when dealing with spending from a multi-sig wallet. Therefore, if ten parties sign a transaction, it will trustlessly combine the ten public keys and crypto signatures into one. The miner will verify the single key and signature and add it to the chain instead of verifying ten signatures. 

The same feature enhances the smart contract functionality in the Bitcoin blockchain. A smart contract involves a complex transaction structure, which takes a lot of computing power to verify. With the Taproot upgrade, all the transactional information will be combined into one and will be verified by the miner as a single transaction. 

This enables easy creation and execution of complex smart contracts, offering flexibility to users. 

Compared to ECDSA signatures, which take up 71-72 bytes of block space, Schnorr signatures take up 65 bytes of block space. These small savings in space in processing each transaction helps to build up more space for transactions in the block. Thus, increasing scalability in Bitcoin’s blockchain. 

How Bitcoin Taproot Upgrade Reduces Transaction Costs? 

The reduced requirement of block space for each transaction increases transaction throughput, leading to reduced transaction costs. 

The Lightning Network is a Layer 2 solution, which enables faster transaction processing and more scalable payments. It processes transactions outside the Bitcoin blockchain and periodically anchors the data in aggregate form to the Bitcoin blockchain. Further, the Taproot upgrade will make transactions on Lightning Network cheaper and flexible. 

How Taproot Upgrade Improves Privacy? 

Well, bitcoin transactions are indeed anonymous, and it is tough to trace the user. But, chain analysis platforms can easily track down the transactions and extract information when it involves spending from a multi-sig wallet.

Schnorr signatures will make all moving parts in a transaction into one as a single-signature transaction and make it indistinguishable. Therefore, anyone monitoring the chain will see spendings from multisig wallets or execution of smart contracts as a single transaction, allowing for more privacy. 

How will Taproot Upgrade Affect Bitcoin’s Price? 

Taproot upgrade is considered the most significant development in Bitcoin blockchain and has proved its ability to upgrade with widespread consensus, which is difficult to achieve. It also sets the foundation for the next phase of innovation. The BIP-342 or the Tapscript included in the Taproot upgrade has made it easier for developers to implement future updates into the blockchain. 

It is anticipated that the Taproot upgrade will accelerate Decentralized Finance (DeFi) adoption on the Bitcoin network. And, if it happens, it will have a similar impact on the price of bitcoin, what the bitcoin halving has. 

Although the short-term impact on prices may be limited, the Taproot upgrade sets the stage for developers to experiment and build new use cases around the Bitcoin blockchain. 

And, the last question, how the Taproot upgrade was executed so smoothly?

Yes, it’s a million-dollar question. So, before the upgrade was executed, the record was set straight that the Taproot upgrade would be implemented only if there was at least a 90% consensus among miners. 

To achieve that, it was decided that miners have to show their support for the Taproot upgrade during the designated two-week difficulty period by including an encoded message. And by the end of the difficulty period, more than 99% of the miners signalled in favour of the upgrade. Check the everyday BTC to INR rate. 

FAQs on Bitcoin Taproot 

What is Bitcoin taproot? 

Bitcoin Taproot is a technical upgrade of the Bitcoin blockchain to make it more scalable, secure and privacy-focused. The upgrade will also improve Bitcoin’s smart-contract functionality, which involves processing complex transaction structures. 

Is taproot good for Bitcoin? 

Yes, the Taproot upgrade is good for Bitcoin blockchain as it improves the blockchain’s fundamentals and has also made it easier for developers to implement improvements in the future. 

Who developed taproot bitcoin? 

The Taproot upgrade was first proposed by Greg Maxwell in 2018. For the last three years, it was in work, and three Bitcoin Improvement Protocols (BIPs) were codified into the Taproot upgrade and is written by Pieter Wuille, Tim Ruffing, A.J. Townes and Jonas Nick,

Will taproot allow smart contracts? 

Bitcoin already possessed the smart contract functionality, but the Taproot upgrade enhances that functionality and enables the process of complex smart contract transactions in less time. 

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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Deepan Datta

Content Writer

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