According to Taproot.watch, Bitcoin will undergo a major network upgrade called Taproot in just two days. This is either Nov. 14th or 255 blocks later. This is the first major upgrade since Segregated Witness (SegWit) in 2018, which ultimately led to the creation and launch of Lightning Network. Gregory Maxwell, a Bitcoin core contributor who was also the former chief training officer at Blockstream, submitted Taproot’s original proposal on January 23, 2018.
The previous SegWit upgrade had been intended to fix transaction malleability and increase the scalability the Bitcoin network. However, Taproot is designed to enhance transaction efficiency, privacy, and support smart contract initiatives. According to Hampus Sjoberg, a Bitcoin developer, the upgrade was only initiated after achieving a 90% consensus among Bitcoin mining nodes. Sjoberg also created Taproot.watch to keep track of the Taproot upgrade’s progress.
Cointelegraph spoke with Ben Caselin from AAX’s head of strategy and research. He said that the Taproot Upgrade to Bitcoin was one of the most significant changes to the network. This upgrade adds smart contract functionality to protocol and optimizes for privacy and cost efficiency.
He also pointed out that smart contract functionality is coming to Bitcoin even though there are many high-performing protocols already in place. He stated that “we must remember that Bitcoin, the only truly non-sovereign internet that offers the highest level of network security on planet Earth,”
Signatures of MAST and Schnorr
The soft fork will bring about the Merkelized Abstract Syntax Tree. This tree will create a condition which will allow both the sender AND the receiver to agree on the settlement of a transaction. Merkle trees, a well-known compact complex data structure, were created by Ralph Merkle (one of the founders of public key cryptography).
Bitcoin currently uses the pay-to-script hash (P2SH). This ensures that Bitcoin only hashes the script that is being sent on-chain. The underlying technology requires that all conditions necessary for tokens to be spent are shown. This includes those that were not met during the transaction. It is not ideal for privacy because anyone can see the details of the wallet used and the possible ways that the funds were spent.
MAST ensures that all conditions that can be used for funds are hashed separately and include them in a Merkle Tree. This will create a Merkle root which is a single haveh. This makes the network more efficient than P2SH contracts, which require that only certain conditions are met.
The Taproot upgrade will also bring the Schnorr Signature. This algorithm allows users to combine multiplesigs into one transaction. It makes it hard to distinguish between regular transactions and multisig transactions. These signatures conceal if there is any MAST structure from the transaction or token at any time.
Igneus Terrence is the head of communications at Bybit. This cryptocurrency derivatives exchange offers details on this upgrade.
Taproot uses the Trinity of Schnorr signatures and MAST to collect less data in Bitcoin network transaction outputs. This is without compromising security. The end-users will see a greater privacy, efficiency, and lower transaction fees due to the smaller amount of data that is collected and transferred.
Terrence mentioned that Taproot’s upgrade would have a compounding impact on the Lightning Network, which was launched in 2018. This soft fork will allow simple and complex multisig transactions to be treated on the network in equal fashion. This would allow the Lightning Network to realize its true potential through improved efficiency and less discrimination regarding fungibility.
Marie Tatibouet is Gate.io’s chief marketing officer. She spoke to Cointelegraph about the bigger impact the Lightning Network has already had, particularly in El Salvador’s adoption Bitcoin as legal currency. “Strike, one of the most well-known Lightning Network wallets, is responsible for El Salvador’s crypto ecosystem,” she said. The number of lightning network nodes increased from 10,000 to 23,000. In just three months, between May 2021 and July 2021. The Lightning Network is expected to reach 700 million users by 2030, as it stands now.
Although the upgrade will enable smart contracts to be deployed and is the next logical upgrade of the Bitcoin network it would not be realistic to compete with Ethereum, the most popular smart contract blockchain network. Tatibouet stated that while it may take some time for smart contracts to work properly, the utility it will bring in and the user base it will increase will be impressive. But, do not expect Bitcoin’s smart contracts ecosystem to surpass Ethereum’s anytime soon.
Anto Bukov is the co-founder and chief executive officer of 1inch Network, a distributed cryptocurrency exchange. He holds a more definite view on smart contracts. Cointelegraph was told by Bukov that the cryptocurrency was not made for such purposes. Bitcoin is based upon the UTXO model which is not appropriate for smart contracts. This was recently demonstrated by Cardano.”
The short-term impact on price is minimal
Bitcoin has been an interesting investment asset in the days that preceded the upgrade. After briefly reaching $69,000 on Nov. 12, the token crashed almost $7,000 to $63,000 below its original price. According to CoinMarketCap data, the token trades at just $64,000. The asset has a market capitalization in excess of $1.2 trillion and is currently holding on to the $1 trillion mark for almost a week.
The upgrade’s impact may be already priced into the asset’s current price. Bukov also spoke out about the effect on the end-user. Bukov stated, “We are pleased to see Taproot’s technical improvements, but it will hardly have any user impact other than marketing.”
Caselin seemed more optimistic about the asset’s long-term value. He stated, “The immediate softfork has been priced in already. Taproot is well-known to anyone who follows Bitcoin and has adjusted their exposure accordingly. Taproot could be the catalyst, though Bitcoin is still below its fair value, and there is a lot of expectation for a surge in Bitcoin this month. Taproot’s potential has yet to be priced in.
The Taproot upgrade will reduce transaction outputs on the network and open the door to sophisticated smart contracts. The unique feature that makes Bitcoin different from other blockchain networks like Ethereum, Solana and others is its monetary functions. It also has superior network security, which could allow it to attract liquidity that stays on the network for extended periods. This is something that many decentralized finance (DeFi), protocols built on platforms such as Ethereum struggle with and are now stepping into DeFi 2.0.
Caselin spoke out more about the marketwide effect, saying that while Bitcoin might take market share from smart contract platforms, it is likely that mainstream DeFi participants will continue to use Ethereum, Solana and similar protocols. Bitcoin is more suited to serious ventures and capital.
The Taproot upgrade is the first major upgrade to the network in four year. It improves the network’s fundamentals and has a short-term impact on Bitcoin. Over the long term, this upgrade would drive value and could be seen as another step towards “hyperbitcoinization.”