The Bitcoin Taproot upgrade is the first major change to the Bitcoin Core protocol in four years. BTC.com pool opened the vote for the approval of the Bitcoin Taproot upgrade in May 2021; by the end of June, the upgrade was approved by an overwhelming number of miners across the world.
Bitcoin’s last upgrade was a contentious one called Segregated Witness (SegWit), in 2017. Before SegWit was introduced to the Bitcoin network in August 2018, the major issue Bitcoin faced was its poor scalability – it could only run 7 transactions per second. While SegWit was designed to modify the way that the Bitcoin blockchain stores information and enable it to handle higher transaction volumes, it was not compatible with other potential upgrades that were proposed to improve the processing speed of Bitcoin.
The Bitcoin community fractured and a group of users split off from the Bitcoin network, creating Bitcoin Cash in an event known as a Hard Fork. Bitcoin Cash advocates preferred to develop Bitcoin Cash as a cryptocurrency for ubiquitous transactions, while the SegWit upgrade slightly favored the function of Bitcoin as a store of value.
Scalability was again one of the major reasons for Bitcoin to deploy the Taproot upgrade, the other being privacy. The proposed Taproot upgrade can tackle exigent fee issues and enable smart contracts, two major factors that helped it gain consensus from stakeholders and experts. But before the actual scheduled implementation in November 2021, Bitcoin developers must run months of tests to root out bugs that may lead to disastrous and costly consequences.
The Taproot upgrade will replace Bitcoin network’s current Elliptic Curve Digital Algorithm with the Schnorr Signature algorithm. Being a public blockchain, every transaction on the Bitcoin network is traceable but anonymous. However, when a transaction is made with multiple signatories, the Bitcoin network identifies that transaction as a multisig transaction.
The Elliptic Curve Digital Algorithm uses a private key which controls a Bitcoin wallet and ensures that bitcoin can only be spent by the rightful owner. Though transactions will remain transparent under Schnorr Signature, Schnorr will make multi-signature transactions indistinguishable from simpler transactions. This will maintain the principle of anonymity in the Bitcoin network.
More significantly, the Taproot upgrade makes smart contracts feasible on the Bitcoin blockchain network. Currently, smart contracts can technically be created on Bitcoin’s core protocol layer and Lightning Network, but they are far too expensive and limited in scope.
Compared to smart contracts made on other networks such as Ethereum, the ones that can be made on Bitcoin’s core protocol layer are significantly more costly, more time-consuming, and are less powerful. The truth is no one uses the Bitcoin Network for smart contracts. On the other hand, many companies choose to develop smart contracts on Ethereum network since ETH is designed to operate smart contracts, which are the foundation for distributed apps (Dapps), decentralized autonomous organizations (DAOs) and other functions needed for decentralized finance (DeFi). This pushes people to believe that Ethereum has greater potential for future value compared to Bitcoin.
However, Taproot Upgrade will make the smart contracts more affordable, powerful, and efficient by taking up less space on the Bitcoin chain. Numerous major developers and entrepreneurs claim that smart contracts will pave the way for Bitcoin to enter mainstream finance. Bitcoin’s biggest rival Ethereum is known for offering smart contracts in an innovative way that allow applications and businesses to be built on blockchain technology. Once developers start to switch to the Bitcoin network for smart contracts, Bitcoin network will begin to take a much more significant role in decentralized finance, and will outshine other Ethereum rivals in the Smart Contracts space.
In summary, Taproot combines the public keys of all users in a complex transaction in a new unique key. This increases privacy and reduces block space needed for transactions. Taproot also makes previously impossible DeFi projects viable on the Bitcoin network. Taproot also gives a boost to Layer-2 protocols such as the Lightning Network by increasing the capabilities on the Bitcoin base layer.
Overall, Taproot is a widely anticipated upgrade and a positive sign for both blockchain developers and cryptocurrency investors. If Bitcoin undergoes the transition to Taproot smoothly without events such as the 2013 fork (caused by a big in the upgrade code), Taproot will have an immense impact on the entire industry, and pave the way for future developments in blockchain technology.
Do you see a bright future for Bitcoin with the Taproot upgrade? Register for a Huobi account and enjoy a fast, safe trading experience! If you’re new to crypto, you can get a Welcome Bonus of up to $170 by learning how to use your exchange account. On top of that, Huobi Learn can teach you what you need to know about blockchain technology and the crypto industry.