Bitcoin’s taproot upcoming upgrade and how it matters to the network

Bitcoin’s Taproot upgrade has been considered an important first step towards addressing Bitcoin’s lack of privacy and other related concerns. But what is Taproot and how can it benefit Bitcoin? If you are still confused, this article from Tokenize Exchange will help you answer the questions!

Bitcoin has experienced its ups and downs along the way. Regardless of all issues that have arisen over the years, for example, the Mt.Gox hack or the Bitcoin hard forks, the crypto community still keeps their belief in Bitcoin.

However, certain issues cannot be ignored, one of the biggest ones is privacy. Since Bitcoin is based on a public blockchain, anyone can track the transactions that occur in the network. For some, that’s a big concern. Traders can increase anonymity through techniques such as CoinJoins, unfortunately, none of these make Bitcoin a private currency.

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What is Bitcoin’s taproot upgrade?

As the most anticipated upgrade since SegWit, Taproot is a soft fork that improves Bitcoin’s scripts to increase privacy and improve other factors involved in complex transactions. Transactions on the Bitcoin network can use different features that make them more complex, like point time lock contracts and multi-signature requirements.

Without Taproot, anyone can detect transactions using that complex functionality, which requires creating multiple transactions. However, the Taproot upgrade can “hide” all the moving parts of a Bitcoin transaction including these features. So if a transaction applies these features, it will look the same as a normal transaction that can be seen as a big win for Bitcoin privacy advocates.

The recent reports have suggested that the much-await Bitcoin’s Taproot upgrade will be implemented this year. Many major Bitcoin mining pools support the activation of Taproot. According to statistics available on Taproot.watch, Taproot currently occupies about 47% of Bitcoin’s total hash rate. 

Taproot is expected to be included in the protocol after the integration of Schnorr Signature, a related upgrade that enables signature aggregation and supports Taproot implementation instead of Bitcoin’s current signature algorithm or ECDSA (elliptic curve digital signature algorithm).

Why BTC taproot upgrade is important

According to Joel Edgerton, the COO of a San Francisco-based cryptocurrency exchange, Bitcoin’s taproot upgrade reduces transaction data size, leading to lower transaction fees for complex transactions, boost privacy on multisig and time-locking wallets by “mixing” them with simple single-sign wallets. Without Taproot, It is impossible to apply the following upgrades: Musig2, CoinSwap, and Point time lock contracts (PTLCs).

Musig2 enhance risk reduction

Hub Blockstream – Bitcoin development has been developing Musig2 – a new multisig software. Musig2 helps multisig transactions enhance efficiency and privacy. By requiring two or more signatures from many private keys instead of only a single one from a private key like other cryptocurrency wallets, Musig2 reduces the risk by spreading it among multiple keys or parties. 

Besides improving multi-signature wallets, MuSig2 could benefit Lightning Network privacy and improve the signatures commonly used by trading platforms and reserve funds.

If the Taproot upgrade is applied, Blockstream will replace the MuSig1 standard with MuSig2 for Schnorr signature schemes. The Blockstream’s Liquid sidechain could run early Taproot code to test the multi-signature scheme before it’s ready to be deployed on the Bitcoin mainnet. With Schnorr signatures, each signature will be recorded as one signature on the blockchain, lighten the data loads and make it cheaper. 

Coinswap improves the privacy

CoinJoin was the most popular secure transaction on Bitcoin. CoinJoins provides users with good privacy, hence, they have been used in Wasabi wallet, Samourai Wallet and JoinMarket. CoinJoin takes all the inputs from several different users’ transactions and mixes them into one large collaborative transaction. 

However, a Coinjoin transaction shows their differences from a regular one, making it easier to point out CoinJoin transactions. However, Bitcoin’s Taproot upgrade can solve this problem with CoinSwap. The successor of CoinJoin, protocol privacy CoinSwap is the most popular software to mix bitcoin to hide their transaction history. 

According to Belcher, Bitcoin’s Taproot upgrade will fix this problem. “A good benefit of Taproot is also that it allows scriptless scripts. As you may know, protocols like Lightning Network and CoinSwap depend on so-called hash time-locked contracts. Currently, these contracts are visible on the blockchain. The thing that scriptless scripts allow is for those contracts to also look exactly the same as a Taproot single-sig transaction.” CoinSwaps can be made to look invisible and if done correctly, a CoinSwap transaction can look like a vanilla bitcoin transaction, said Belcher.

Similar technology will also extend to the Lightning Network, so blockchain watchers cannot distinguish between CoinSwap transactions, Lightning Network transactions, or regular bitcoin transactions.

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Poin time lock contract

Bitcoin’s Lightning Network currently uses hash time locked contracts (HTLCs) to ease transactions. HTLC is a type of smart contract used in cryptocurrency networks to eliminate counterparty risk by allowing to execute time-limited trades. Based on HTLCs, Poin time lock contracts (PTLCs) were developed with more privacy and efficiency. 

PTLCs use a public key (a point on Bitcoin’s elliptic curve) and can be unlocked by a corresponding signature from a signature adapter. Transactions are nodded on Lightning Network by transferring a hash of the payment to each node on that payment’s path. PTLCs modifies this hash by adding random info to each hop to make the transaction more difficult to be tracked. 

When Schnorr signatures are implemented on Bitcoin, it will be possible to apply PTLCs since it requires signature adaptors. At the moment, the unavailability of Schnorr signatures in altcoins might prevent the application of PTLCs in some cross-chain contracts. “Technically, PTLCs could be done today with ECDSA but it doesn’t have the same proven security, and if it was implemented it would have to be redone once we get Taproot,” said Ben Carman, a developer at Suredbits. 

The effect of BTC taproot

Another controversial aspect of the upgrade proposal is whether Taproot has a major influence on Bitcoin’s future price. In this regard, Edgerton does not see the activation having any short-term impact on the value of Bitcoin. However, he believes that this update will make the Bitcoin network more efficient and competitive. Especially after Bitcoin dropped about 13% in the last 24 hours and nearly 34% for a week.

According to Lior Yaffe, CEO of blockchain software company firm Jelurida, the recent surge in Bitcoin price can be attributed to its potential to be used as a store of value and accepted by institutional investors, however, he did not expect Taproot to have any short-term meaningful impact in BTC price. 

Tokenize Blog believes that Bitcoin’s Taproot upgrade will improve the adoption of the Lightning network by reducing transaction fees and settlement times. Hence, it will impact Bitcoin price in the long run. 

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