Bitcoin’s Taproot Upgrade. What is it and how has it helped investors?

Bitcoin is the world’s first created cryptocurrency. It is the backbone of the cryptocurrency Universe. It has the largest market capitalisation in the global decentralised financial market. It is an extensive system with a grandiose resource base working on the most advanced technological solutions.

In its more than 13-year history, it has undoubtedly made its investors happy with income growing exponentially and it has naturally undergone technical changes through the period. Bitcoin’s most powerful upgrade started at the end of 2021. Its name is Taproot. It was the biggest network upgrade since SegWit in 2017, which led to the creation of Bitcoin Cash.

What is the Bitcoin Taproot upgrade?

Bitcoin, despite its powerful position in market capitalisation and global cryptocurrency market share, like all large-scale branching systems, lacks lightness and agility, unlike other, younger and more mobile cryptocurrency projects. And the team has to be on the lookout for, and sometimes catch up on, the key metrics of all decentralised systems that are important to users:

• lower fees;
• faster transaction speeds;
• privacy and reduction of intermediaries; 
• potential scalability. 

These were the main objectives of the Taproot update. Miners around the world have endorsed its potential implementation.

How did Taproot go live?

A group of smart people, experienced professionals, marketers, financiers and developers got together and after a thorough analysis of system requests and user preferences, developed and implemented it. It took no less than 3 years from idea to implementation.

Whose idea was it?

The idea of Taproot upgrade was proposed in 2018 by a developer for Bitcoin Core, open-source software created by Blockstream Gregory Maxwell. Bitcoin Core is the predominant software client for Bitcoin, meaning it allows individuals to interact with the blockchain. By downloading Bitcoin Core, people can take part in validating transactions on the Bitcoin blockchain.

The limitations of the Bitcoin network

The biggest weaknesses of the Bitcoin network have traditionally been considered to be:

1. Low transaction speeds and high fees. This is due to the large number of nodes connected to the network at the same time. This increases tensions in the network and raises internal competition for transactions. Which will become the priority? Speed or transaction fees? The faster the transaction, the higher the fee and vice versa.
2. Lack of privacy (security). Third parties, ranging from ISPs, and governments to greedy hackers, can monitor and adjust Bitcoin network traffic because it is insufficiently encrypted. Therefore, each operation needs to be verified multiple times. Which again slows down transaction times.

How does Taproot work? The main objectives

The main tasks of the Taproot update are:

1. Reducing the number of fees on the bitcoin network by introducing multi-signature technology and implementing the Schnorr scheme. Previously, the cryptocurrency used digital signatures based on the ECDSA cryptographic scheme. Taproot, on the other hand, allows the transaction to accumulate multiple signatures and form a single one. The fees for multi-signature transactions are expected to be lower because less data is needed to validate them.
2. Following the Taproot update, the first cryptocurrency network is now able to create complex smart contracts thanks to the integration of the MAST concept. The technology allows separate hashes to be generated for each spending condition. Smart contracts are represented in the blockchain as regular transactions. More details are below.

Schnorr Signatures (BIP340)

*BIP is a Bitcoin Improvement Protocol

Schnoor is a digital signature algorithm invented in the 1980s by a German man, Claus-Peter Schnorr. Schnorr’s signature algorithm makes financial operations more confidential and also extends the capabilities of multi-signature wallets. Individual bitcoin wallets do not become more anonymous, but multi-signature transactions become indistinguishable from simple transactions. In other words, Schnorr signatures increase the group of transaction types that can be made to appear ordinary.

In addition, the mechanism for implementing smart contracts has changed. They will also become cheaper and more compact in terms of blockchain space.

Taproot (BIP341). Integration of the MAST concept

Following the Taproot update, the first cryptocurrency network is now able to create complex smart contracts thanks to the integration of the MAST concept. The technology allows the generation of separate hashes for each spending condition. Smart contracts are represented on the blockchain as regular transactions. 

Previously, in order to dispose of their digital asset, the user had to confirm that they were the true owner. In addition, there are features on the network that further complicate transactions, including temporary blockchains, multi-signature requirements and others. On top of the standard time losses, during multi-signature transactions, transaction information is automatically made available on the blockchain, potentially exposing sensitive data about address owners. 

The implementation of MAST, on the other hand, after the upgrade is designed to reduce the number of scenarios. Instead of full details, MAST allows only executed transaction conditions to be recorded on the blockchain, providing greater privacy for Bitcoin users.

Tapscript (BIP342). More free space

The purpose of Tapscript is to make room for other BIPs. It is an update of the coding language, providing more possibilities for future implementation of new features and smart contracts on the network.

You can watch an interesting opinion about the process of approving and rolling out BIPs in the Trader University video 

How does Taproot benefit Bitcoin?

Analysts had expected that Bitcoin’s upgrade would trigger its rise in price and financial benefits for cryptocurrency investors. So far, given the effects of the pandemic, and the crisis in some economic sectors around the world related to Russia’s military aggression in Ukraine, the economic preferences for the network’s investors are difficult to assess. 

But, in fact, this update has produced exactly the results that the developers intended and wanted technically to solve within the system for its participants. 

As a result of the Bitcoin teamwork, Taproot:

• decreased the speed of transactions in comparison with previous periods;
• reduced fees by optimizing operations;
• increased protection for network users by ensuring greater anonymity of operations and confidentiality of users’ personal data.

Why is the Taproot upgrade important?

Taproot has given Bitcoin a strong boost for further development in terms of marketing and technological improvements. It has reduced users’ concerns in terms of privacy, lengthy transactions and high fees. To what extent has it helped stabilise the world’s largest-cap cryptocurrency in the current market environment? Time will show.