Your expert in blockchain regulation. A сertified crypto AML specialist & the CEO of AMLBot and AMLSafe.
While crypto prices are skyrocketing (yet again), the very important technology behind crypto asset #1 gets unnoticed. We screened the news for experts’ take on a technical upgrade of Bitcoin.
Starting August 23, 2017, Bitcoin allowed the process of splitting transactions into blocks by separating signatures. This format is called SegWit (or Segregated Witness) – a soft fork designed to avoid accidental transactions and make the network run faster.
Since the digital signature accounts for 65 percent of a transaction, removing it from the data increased the maximum size of the Bitcoin block from 1MB to almost 4MB. It allowed transactions to reduce the size and fit more of them into a single Bitcoin block. The BTC network gained additional scalability and made transactions faster.
In January 2018, Bitcoin developer Gregory Maxwell proposed a new BTC protocol update, called ‘Taproot’. According to his paper, the new technology will increase transaction privacy, make it more efficient, and eliminate some of SegWit’s deficiencies.
Taproot is the most significant BTC update since the SegWit soft fork of 2017. It is intended to increase Bitcoin's fungibility, improve the functionality of smart contracts, and boost privacy by making all transactions look the same to outsiders.
Notably, the Taproot upgrade comes along with the Schnorr Signature algorithm. It is considered among the best in the cryptocurrency field by offering high effectiveness and supporting multi-signature options. Bitcoin transactions often include multiple inputs and each of them requires a separate signature. Schnorr allows all of the signatures to be combined and stored as one, freeing more room and simplifying the transaction.
A Schnorr signature is a digital signature algorithm developed by a German mathematician Claus Schnorr in 1989. It is well-known for the ability to aggregate multiple signatures into a single one, which makes transactions indistinguishable thus increasing privacy.
According to Bitcoin Optech contributor Steve Lee, the Taproot & Schnorr soft fork brings the following opportunities:
Taproot’s biggest role is to make transactions similar so they cannot be recognized by outsiders. Even the most complex smart contracts on the blockchain will look analogous to regular transactions. Taproot’s actual innovation is its flexibility for privacy-protecting cooperative spending: Bitcoin users can combine their signatures into one key and use it as programmable funds without identifying their purpose, which improves both privacy and fungibility.
After Binance Pool’s approval in December 2020, the Taproot upgrade is now supported by mining pools with over 90% of the total hash rate. As VP at Poolin Alejandro De La Torre said, this signals the agreement to proceed with implementing Taproot in the nearest future. A number of experts foresee Taproot and Schnorr to be the biggest topic and development focus in the 2021 Bitcoin world.
Being a consensus protocol upgrade, Taproot requires changes to Bitcoin nodes (network connections), that have to be made through a soft fork. There are several proposed ways to implement the upgrade and all of them rely on two Bitcoin Upgrade Proposals (BIP): BIP8 or BIP9. They are similar and offer slightly different approaches: BIP8 includes a ‘flag day’ rule, which requires all the miners to adopt the update by a set date.
On the other hand, BIP9 offers a signaling period when miners have to express their support for the changes. If this does not happen, then the process starts again. Per Jonas Nick, a Bitcoin Core developer, BIP9 is the most favorable and reasonable choice. If miners have enough time to approve the update and signal their support, it will minimize the possibility of a hard fork scenario.
Among all the approving voices, Nikita Zhavoronkov, portfolio tracker Blockchair developer, expressed his doubts over the upgrade’s privacy benefits. In particular, Nikita assumes that it is Lightning developers who advocate for Taproot to make transactions cheaper. We quote: “they want a discount for their broken product no one uses at the expense of everyone’s privacy!” (formatting is ours).
However, his unsupported claims have been dismissed by George Maxwell since Taproot was developed specifically to address the issues Zhavoronkov spotlighted.
At the time SegWit was introduced, it was strongly contested. In fact, the initial proposal, SegWit2X, was rejected and replaced by what is known as SegWit. However, after the soft fork occurred, it has been quickly adopted as a new standard.
On the contrary, Taproot seems to cause no disagreement among the Bitcoin community. Since its publishing, many developers have reviewed the proposal and expressed no considerable concerns so far.
As Messari and BitMEX Research pointed out, overall the Schnorr signature and Taproot soft fork proposal have hardly any downsides. Their scalability and privacy upgrades are obvious improvements as compared to SegWit. Given that the overwhelming majority of mining pools have already approved Taproot, now it is only a matter of time when the new technology gets implemented.
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