Bitcoin Taproot update improves network, but impact on BTC price may be limited

Bitcoin will undergo a major network upgrade, Taproot, in almost two days, that is, on November 14 or 255 blocks later, according to data from Taproot.watch. This is the first significant update since Segregated Witness (SegWit), which finally culminated in the development and launch of the Lightning Network in 2018. Taproot’s original proposal was made by Bitcoin core contributor and former Blockstream head of training, Gregory Maxwell, on January 23, 2018.

While the previous SegWit update aimed to resolve the malleability of transactions and improve the scalability of the Bitcoin network, The Taproot upgrade aims to improve transaction efficiency, network privacy, and its ability to support smart contract initiatives. The update went live after reaching a 90% consensus among Bitcoin mining nodes on June 12, as Bitcoin developer Hampus Sjöberg announced on Twitter. Sjöberg also created the Taproot.watch website to follow Taproot-related updates.

Ben Caselin, head of research and strategy at AAX, a cryptocurrency exchange told Cointelegraph: “The Taproot update coming to Bitcoin is one of the most impactful changes that have been implemented in the network. The update brings the functionality of smart contracts to the protocol, and optimizes cost efficiency and privacy.”

He also noted that the smart contract functionality coming to Bitcoin is significant even though there are so many high-performance protocols already in place, stating that “We have to remember that Bitcoin is the only truly non-sovereign network that offers the highest degree of network security on the planet.”

MAST and Schnorr firms

The fork will enter the Merkelized Abstract Syntax Tree (MAST). This tree will introduce a condition that will allow the issuer and receiver of the transaction to sign a transaction together for settlement. Merkle trees are a compact and complex data structure that was invented by Ralph Merkle, one of the inventors of public key cryptography.

Currently, Bitcoin uses the pay-to-write hash (P2SH) which ensures that only one hash of the write goes on-chain. Thus, when tokens are spent, the underlying technology displays all possible conditions that could have been met, including those that were not met in the transaction. The downside to this is that it is very data heavy, which is unnecessary, and not ideal for privacy, Well, anyone on the blockchain can investigate the ways in which the funds could have been spent, the type of wallet being used, and possibly more of such details.

MAST ensures that the various conditions under which funds can be spent are individually hashed and included in a Merkle tree that will produce a Merkle root, which is a single hash. This ensures that only the conditions that are met will have to be disclosed, thus making the network more data efficient than previously used P2SH contracts.

What’s more, the Taproot update will incorporate the Schnorr signature. This algorithm will allow users to add multi-signatures in a single transaction, making it difficult to differentiate between regular transactions and multi-signature transactions. Essentially, these signatures hide whether a MAST structure of the token or transaction exists at any time.

Igneus Terrence, Head of communications at Bybit, a cryptocurrency exchange, spoke to Cointelegraph about the details of this update:

“Using the trinity of signatures Schnorr, MAST, and Tapscript, Taproot enables less unnecessary data collection on the Bitcoin network’s transaction outputs without sacrificing security. By virtue of the less amount of data collected and transferred, the benefits for End users will see better privacy, more efficiency and lower transaction fees. “

Terrence also mentioned that the Taproot update would have a compound effect on the Lightning Network launched as early as 2018. After this soft fork, single, multi-signature, and Lightning Network transactions will be treated equally on the network. This would unlock the true potential of the Lightning Network through greater efficiency and less discrimination in fungibility.

Marie Tatibouet, Gate.io’s chief marketing officer, spoke to Cointelegraph about the huge impact the Lightning Network has already had, especially on the adoption of Bitcoin as legal tender in El Salvador. She said: “Strike, one of the most popular wallets on the Lightning Network, is responsible for powering El Salvador’s cryptocurrency ecosystem. In a three-month period between May and July 2021, the number of nodes on the Lightning Network jumped from 10,000 to 23,000. As things stand, the Lightning Network is projected to reach 700 million users by 2030. “

Although the update will allow the deployment of smart contracts and is the next logical upgrade for the Bitcoin network, it would be unrealistic to compete with the most widely used blockchain network of smart contracts, Ethereum, in the short term. In this regard, Tatibouet said: “Although it will take some time for the right contracts to work properly, the utility and user base it will bring will certainly be impressive. However, do not expect the Bitcoin smart contract ecosystem to eclipse that of Bitcoin. Ethereum soon “.

Anto Bukov, Co-founder of 1inch Network, a decentralized cryptocurrency exchange, has a more absolute opinion on smart contracts. He told Cointelegraph: “It was not designed for this purpose. Bitcoin is based on the UTXO model, which is not suitable for smart contracts. Cardano has recently demonstrated this.”

Short-term price impact is limited

The days leading up to the update have also been interesting for Bitcoin as an investment asset. The token briefly hit an all-time high of $ 69,000 on November 12, before plummeting nearly $ 7,000 to below $ 63,000. Currently, the token is trading just below $ 64,000, according to data from CoinMarketCap. The asset currently has a market capitalization of more than $ 1.2 trillion, hovering above the coveted trillion dollar mark for nearly a week.

However, the impact of this update may have already been discounted from the current price of the asset. Bukov also referred to the impact on the end user. He claimed: “We see interesting technical improvements in Taproot, but it will hardly have an impact on the user, except for marketing.”

Caselin seemed to be more hopeful about the long-term price impact of this asset. He mentioned: “The immediate soft fork is already priced. Anyone who understands and follows Bitcoin has been aware of Taproot and will have adjusted their exposure accordingly. However, given that Bitcoin is still below fair value and a further rise is expected this month, Taproot could provide the impetus. However, in terms of its potential, Taproot has not been valued at all. “

Since the Taproot upgrade would reduce the throughput of transactions on the network, it opens up the possibility of deploying sophisticated smart contracts. A differentiating element compared to other blockchain networks that already have advanced smart contract utilities such as Ethereum, Solana, etc., is that the monetary functions of Bitcoin and the superior security of the network could attract liquidity that remains in the network for long periods. . This is an aspect that several decentralized finance (DeFi) protocols built on platforms such as Ethereum are currently struggling with, and which are entering DeFi 2.0 to fix it.

Caselin spoke further about the impact on the entire market, saying: “Bitcoin could take some market share away from smart contract platforms; however, major players in DeFi are more likely to stick with Ethereum, Solana, and similar protocols. Bitcoin is better suited for more serious startups and capitals.” .

Regardless of the short-term price impact that the Taproot upgrade may or may not have on Bitcoin, it is clear that the upgrade, which is the network’s first upgrade in four years, is an important step for the network as it improves its capabilities. even more fundamentals. In the long term, this update would boost value and could be seen as one more step towards ‘hyperbitcoinization’.

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