Upgrading Bitcoin Taproot improves the network as the impact on the BTC price can be limited

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Bitcoin will be out in almost two days, i.e. H. Underwent a major network upgrade, Taproot, on Nov. 14, or 255 blocks later, according to data from Taproot.watch. This is the first major upgrade since the Segregated Witness (SegWit), which eventually culminated in the development and launch of the Lightning Network in 2018. The original Taproot proposal was made on 23rd, 2018.

While the previous SegWit upgrade aimed to fix the malleability of transactions and improve the scalability of the Bitcoin network, the Taproot upgrade aims to improve transaction efficiency, the privacy of the network, and its ability to support smart contract initiatives. The upgrade was only started after on the 12th Sjöberg also created the website Taproot.watch to track the updates for the Taproot upgrade.

Ben Caselin, Head of Research and Strategy at AAX, a cryptocurrency exchange, told Cointelegraph, “The Taproot upgrade coming to Bitcoin is one of the most influential changes to be implemented on the network. The upgrade adds smart contract functionality to the protocol and optimizes cost efficiency and data protection. “

He also noted that the smart contract functionality that is coming to Bitcoin matters, even though there are so many powerful protocols out there already, and said, “We need to remember that Bitcoin is the only one that is really not sovereign Network is the highest level of network security on the planet. “

MAST and Schnorr signatures

The soft fork introduces the Merkelized Abstract Syntax Tree (MAST). This tree introduces a condition that enables the sender and recipient of the transaction to jointly sign a transaction for settlement. Merkle trees are an established compact complex data structure invented by Ralph Merkle, one of the inventors of public key cryptography.

Bitcoin currently uses the Pay-to-Script hash (P2SH), which ensures that only one hash of the script is running in the chain. Therefore, when tokens are issued, due to the underlying technology, it is necessary to identify all possible conditions that could have been met, including those that were not met in the transaction. The downside to this is that it’s very data intensive, which is unnecessary, and it’s not ideal for privacy as anyone on the blockchain can examine how the money could have been spent, what type of wallet is used and possibly more such details.

MAST ensures that the various conditions under which the money can be spent are individually hashed and put into a Merkle tree that creates a Merkle root that represents a single hash. This ensures that only fulfilled conditions have to be disclosed, which makes the network more data efficient than the P2SH contracts used up to now.

In addition, the Taproot upgrade will bring in the Schnorr signature. This algorithm allows users to group multisigs into one for a single transaction, making it difficult to distinguish between regular transactions and multisig transactions. Essentially, these signatures are hidden if at any point in time a MAST structure from the token or transaction existed.

Igneus Terrence, Head of Communications at Bybit, a cryptocurrency derivatives exchange, spoke to Cointelegraph about the specifics of this upgrade:

“Using the trinity of the Schnorr signatures MAST and Tapscript, Taproot enables less unnecessary data acquisition in the transaction outputs of the Bitcoin network without compromising security. Due to the lower amount of data collected and transmitted, the benefits for end users are seen in better privacy, greater efficiency and lower transaction fees. “

Terrence also mentioned that the Taproot upgrade would have a reinforcing effect on the Lightning Network, which was launched in 2018. According to this soft fork, simple, complex multisig and Lightning Network transactions are treated equally in the network. This would unlock the true potential of the Lightning Network through increased efficiency and reduced discrimination in fungibility.

Marie Tatibouet, Chief Marketing Officer at Gate.io, spoke to Cointelegraph about the bigger impact the Lightning Network has already had, particularly with El Salvador’s introduction of Bitcoin as legal tender. She said, “Strike – one of the most popular Lightning Network wallets – is responsible for powering El Salvador’s crypto ecosystem. In a period of three months between May and July 2021, the number of lightning network nodes jumped from 10,000 to 23,000. From today’s perspective, it is predicted that the Lightning Network could reach 700 million users by 2030. “

Even if the upgrade enables the provision of smart contracts and is the next logical upgrade for the Bitcoin network, it would be unrealistic to compete with the most widely used smart contract blockchain network Ethereum any time soon. Tatibouet said: “Although it will take some time for proper contracts to work properly, the benefits and user base they bring will certainly be impressive. However, don’t expect Bitcoin’s smart contract ecosystem to eclipse Ethereum’s anytime soon. “

Anto Bukov, the co-founder of 1inch Network, a decentralized cryptocurrency exchange, takes a more absolute view of smart contracts. He told Cointelegraph, “It was not designed for that purpose. Bitcoin is based on the UTXO model, which is not suitable for smart contracts. Cardano recently proved this. “

Short-term price effect is limited

The days before the upgrade were also interesting for Bitcoin as an asset. The token briefly hit an all-time high of $ 69,000 on November 12, before plunging nearly $ 7,000 below the $ 63,000 mark. The token is currently trading just below $ 64,000, according to data from CoinMarketCap. The asset currently has a market cap of over $ 1.2 trillion and has now been above the coveted $ 1 trillion mark for almost a week.

However, the effects of this upgrade may already be factored into the current price of the asset. Bukov went on to talk about the impact on the end user. He said, “We’re seeing interesting technical improvements in Taproot, but it will have little impact on users except for marketing.”

Caselin appeared to have more hope of the long-term price impact of this asset. He mentioned: “The instant soft fork is already priced in. Anyone who understands and tracks Bitcoin knows Taproot and will have adjusted their exposure accordingly. However, with Bitcoin still trading below its fair value and further spike this month is widely expected, Taproot could provide the impetus. Nevertheless, Taproot is not priced in at all in terms of its potential. “

Since the Taproot upgrade would reduce transaction expenses in the network, it opens up the possibility of using sophisticated smart contracts. A difference from other blockchain networks that already have advanced smart contract utilities like Ethereum, Solana etc. This is an aspect that various Decentralized Financial Protocols (DeFi) on platforms like Ethereum are currently struggling with and which are stepping into DeFi 2.0 to address them.

Caselin spoke more about the market-wide impact, saying, “Bitcoin could take some market share away from smart contract platforms; However, it is more likely that DeFi’s mainstream participants will stick to Ethereum, Solana, and similar protocols. Bitcoin is better suited for more serious ventures – and serious capital. ”

Regardless of the short-term price impact the Taproot upgrade to Bitcoin may or may not have, it is obvious that the Taproot upgrade, which appears as the first upgrade for the network in four years, is an important step for the network as it is improves its fundamentals even further. In the long term, this upgrade would add value and could be seen as a further step towards “hyperbitcoinization”.