What Is Taproot, And What Effect Does It Have On The Bitcoin Protocol? Is The Bitcoin Community Undergoing A Fundamental Change In The Future? 

What effect will the Taproot promotion on Bitcoin have on public acceptance and the price of this digital currency?

These are questions that have occupied the minds of many digital currency users in recent months as the Bitcoin network upgrade has been finalized.

Bitcoin For many investors, it represents a new, ideal, and attractive store of value. Bitcoin’s potential to become a valuable reserve has earned it the nickname “Second Gold” and “Digital Gold” for the King of Digital Currencies.

In many ways, Bitcoin is an upgraded version of gold as a store of value. The scarcity of bitcoin is provable, and the storage of value in bitcoin is much less expensive than gold.

However, gold was known as a tool to store value 5,000 years before Bitcoin, and its fluctuations are significantly less than Bitcoin. In addition, gold has industrial uses, and because of its tangible beauty, there is always a demand for it.

In the meantime, perhaps the biggest truth that distinguishes bitcoin from gold is that the bitcoin network is an evolving technology. Gold will remain gold in all cases. Your gold can’t turn silver or lead occasionally or be an improved version of it. In contrast, the bitcoin network can change. Bitcoin is a scalable technology that can adapt over time to changing needs of users, developers and miners.

On June 12, 2021, a significant number of miners announced their support for an upgrade in bitcoin technology called the “Taproot Upgrade.” Taproot is a collection of 3 proposals aimed at strengthening network security, privacy, and scalability.

Taproot is the most important upgrade of the Bitcoin network since the update of increasing the capacity of the block in 2017 (2017), which is entitled segwit(SegWit) is called (SegWit stands for Segregated Witness).

The benefits that this upgrade is expected to bring are as follows:

• Merge all types of bitcoin transaction outputs into a single outlet called Taproot Output, which makes different transactions unrecognizable and improves privacy
• Improved bitcoin programming capabilities (including the addition of features such as Smart contracts)
• Increase data productivity using a more efficient signature algorithm and better transaction structuring method
• Increased security due to a new signature scheme that will turn Bitcoin into a Chinese block with two signatures.

But there are also risks to this upgrade:

• The acceptance rate of this update is low, which indicates that Bitcoin users are not interested in adding anything new to Bitcoin;
• Low acceptance rates preclude potential privacy benefits;
• The new signature plan may be «Quantum resistance» Have less than the current plan;
• There is a possibility that the Bitcoin community will split due to disagreements over the promotion of Taproot, which is unlike the controversy over Segwit that has led to Bitcoin Cache Yes, no.

We help in this report an article Published on the Coin Telegraph website. We will explain the benefits and risks of this upgrade and examine how this historic upgrade will implement on the Bitcoin network. Knowing this can help gain the right perspective on Bitcoin (as a tool for investing).

What is Taproot Upgrade?

Miners signal status to Taproot upgrade; A green signal means agreement.

The Taproot upgrade includes three Bitcoin Improvement Proposals (BIPs) available at Github (github.com) at 340, 341, and 342.

In short, Taproot is designed to improve the security, privacy, and performance of Bitcoin. This update accomplishes these goals through the following steps:

Abstract of structured information in the Merkel tree

” Review the information in the tree-structured Merkel ‘or Merklized Abstract Syntax Trees that briefly MAST called, the type of structure and spend bitcoins conditions change. They reduce the number of inputs required, thereby reducing the data required to verify transactions.

What is the feature of paying to Taproot?

The ” Pay-to-Taproot ” feature merges all bitcoin outputs, regardless of transaction type (Segovite and non-Segovite), creating a single Taproot output on the Bitcoin network. This method improves the productivity and privacy of transactions.

Ashnor signatures

In the Taproot update, ” Schnorr Signatures ” replaces the current cryptographic signature scheme called ECDSA. ECDSA stands for Elliptic Curve Digital Signature Algorithm Is.

These three BIPs run simultaneously to encourage service providers and wallets to upgrade their software. In this way, this upgrade is accompanied by maximum acceptance, and more users can enjoy its benefits.

What are the benefits of upgrading Taproot?

Taproot enhances the usability of bitcoin and expands the available bitcoin market. It isn’t easy to quantify the effects of this update; But qualitatively, its advantages are as follows:

Further development in the field of applications

Smart contracts are automated digital contracts whose contents and execution are written in code or script. Bitcoin is not normally associated with smart contracts, But instead, China blocks ethereum With its smart contracts and development Decentralized applications We know the Chinese blockchain that uses these contracts.

However, Bitcoin has features that allow it to create native smart contracts. Bitcoin transactions can be scheduled for scheduled payments to be made whenever the necessary conditions are met, and the contract terms are fulfilled.

Bitcoin smart contracts are now also used in multi-signature wallets. These are the contracts that are the transactions Lightning Or lock units of bitcoins for a certain period of time to ensure that these are not spent during this time.

The problem to date is that creating such smart contracts in the Bitcoin blockchain is costly and costly. In addition, if a user wants to submit a complex bitcoin transaction, they must place the script separately on each transaction entry.

When those scripts are executed, all the contract terms will be revealed, including those that have not been executed. For this reason, transactions involving bitcoin contracts contain a lot of data and are not privately viable.

Taproot splits the execution of bitcoin scripts into smaller steps, making only the executed script visible. In the same way, the Taproot update makes Bitcoin smart contracts more efficient and practical.

Tarot’s ability to use the items under the contract’s confidential records or Discreet Log Contracts (abbreviated DLC ) called them to improve. These contracts are a new type of Bitcoin blockchain smart contracts.

You may have heard the somewhat embarrassing story of two Bitcoin supporters betting on the outcome of the US election. BTCPay Serve co-founder Nicolas Dorier and Suredbits co-founder Chris Stewart used the same DLC contracts to bet on the 2020 US presidential election results.

With Taproot, DLC contracts leave less mark on the chain, making it easier to execute smart bitcoin contracts.

Many people use terms such as “revolutionary” and “flexible” to describe smart contracts; But with all that said, we still have a long way to go before the use of smart contracts on bitcoin becomes a common process.

Thus, although Taproot will make Bitcoin smart contracts more operational, it will be shortly. Decentralized applications (Dapp) and Decentralized autonomous organizations(Daos) based Bitcoin (including China Atrium features are blocked) will not.

Instead, we are likely to see the emergence of smart bitcoin contracts in the areas of insurance payments, residential real estate transactions, and financial continuity products in the short term, which offer significant opportunities. For example:

• Life insurance payments can schedule based on an acceptable receipt of a death certificate or equivalent. These types of payments in 2019 in the United States exceeded $ 760 billion.
• Residential real estate transactions can finalize after the seller’s bank has approved the mortgage payment receipt. Statistics show that 5.8 million homes were sold in the United States annually in May 2021 (May 1400). The average price of these houses was $ 350,000.
• Annual financial pensions can pay at a specified time and on a scheduled basis. The value of annual pension assets in the United States exceeded $ 3 trillion by 2020.

Of course, it is not yet clear how Bitcoin will penetrate these markets. In the meantime, perhaps the factor that determines the success of Bitcoin in penetrating these markets is the amount of customer demand to pay all or part of these revenues in the form of Bitcoin.

Finally, insurance companies that issue life insurance or sell annuity products represent some of the most conservative institutions in the financial world. These companies launched in the mid-1800s, and their motto was lifelong activity.

If these insurance companies succumb to their customers’ demand to enter the field of digital assets and blockchain, this demand will most likely go to bitcoin. Bitcoin is technologically more conservative than Atrium and more blockchain than the Chinese blockchain.

Bitcoin is also more similar to gold and money than its competitors, so it is easier to understand its value. MassMutual is one of the insurance companies that has invested in Bitcoin and companies active in the field of Bitcoin.

Productivity of

Ashnor signatures improve the productivity of transactions with a single signer. Ashnor signatures are 64 bytes; While ECDSA signatures are between 71 and 73 bytes. This means that their performance per transaction is about 11% higher than ECDSA signatures.

Of course, there is no guarantee that The network will accept taproot transactions. Bitcoin users are free to adhere to the traditional technology of bitcoin transactions. Still, if Taproot transactions are accepted, we will need fewer resources to verify transactions and maintain the network to execute Full ninety.

This feature encourages users to run their own full node and, in turn, enhances bitcoin decentralization. The more decentralized the Bitcoin network is, the greater the possibility of operating without it and resisting censorship. These two characteristics (unauthorized activity and resistance to censorship) are crucial in determining the value of this digital currency.

It is clear that the weakening of decentralization in Bitcoin is equally damaging to its entire network and devaluing it (unlicensed operation of the Bitcoin network means that it operates outside the control of centralized powers or external intermediaries). Of course, given that at present, the number of active nodes in the Bitcoin network is sufficient, reducing (limited) their number will not be a problem for this network.

It is not clear how many ninety is enough to maintain the bitcoin network. In fact, it is not the number of nodes that matters. What is important is the active and effective presence of users who operate in the Bitcoin network, check the accuracy of transactions based on their own node information, and help download the chain from new nodes.

This process is similar to Hash Rite Bitcoin mining is where the higher the hash rate, the better; But reducing it until it reaches a certain level does not mean a bad situation.

Bitcoin network nodes over time; Source: Luke Dashjr

In addition, because Ashnor signatures have less data, Taproot upgrades may increase the average number of transactions included in each block and reduce transaction fees for users.

Bitcoin transaction fee changes; Source: Coin Metrics

Of course, the cost of bitcoin transactions depends on a wide and variable set of influential components. However, in multi-signature and scheduled transactions, we can be sure that their fees will significantly reduce despite Taproot.

Improve the performance, usability, and privacy of Bitcoin wallets

Taproot is designed to improve the performance of multi-signature wallets. Using this type of wallet requires more than one signature, and this feature makes them more secure than single-signature wallets. Taproot is designed to increase the productivity of these transactions in terms of data (volume).

In terms of privacy, Taproot has also brought updates to these wallets. Separate transactions obscure the conditions required to spend the bitcoins in multi-signature wallets. This means that instead of publishing the terms of the transaction publicly, each condition is treated separately And is placed in the structure of the Merkel tree, the final output of which is the Merkel Root. Therefore, we do not need to disclose all the data; we only need Merkel root and Merkel path.

Currently, multi-signature wallets are created using smart contracts on Bitcoin. As mentioned earlier, Bitcoin smart contracts are now a form that reveals the full terms and conditions of multi-signature wallets with every transaction.

For example, information disclosed from a multi-signature wallet may indicate that transactions must be signed by 3 out of 5 valid signatures or by a single original signature. Even if the original signature is never used, the blockchain reveals the public address attached to the original signature in each transaction and poses a potential security threat.

Taproot security upgrades in this regard are implemented in two ways:

• With the transfer of funds, the terms and conditions of spending bitcoins will not reveal;
• Given the Pay-to-Taproot feature, which merges all transaction outputs and shows the same, no one can tell if a company uses multiple signatures.

Although promoting Taproot improves privacy, legal investigations into the Bitcoin blockchain do not make it impossible. Bitcoin is still a Nymhnashnas network, and Qablrdyaby (which can be of legal studies) will remain. Bitcoin to a privacy-like currency Zcash And Monero Will not convert and still has less privacy than cash.

The chart below shows the number of bitcoins that have been kept in multi-signature wallets since 2018. This number has grown by 55% compared to 2018, But it has remained stable since its historical peak was recorded in July 2019.

Bitcoins in multi-signature wallets by type; Source: BitMex and Coin Metrics

This stagnation in the last two years can remind us of an important point:

If Taproot is widely accepted, we may see an increase in the acceptance of wallets and multi-signature transactions by individuals and companies for whom privacy is of paramount importance.

However, the slowdown or slowdown in the use of multi-signature wallets in recent years may indicate that demand for this feature has declined. It should be noted that if the acceptance of the Bitcoin community accompany the promotion of Taproot, it is no longer possible to provide such analysis and statistics; Because the output of all transactions looks the same.

Finally, Taproot allows you to use wallets and design signatures based on one of Ashnor’s signature features called “linearity.” With this feature, signatures can combine. For example, you can create a multi-signature wallet that eliminates the need for three signatures over time. If the funds in the wallet remain intact for a certain period of time, only two signatures are needed to use it…

Development of second-level scalability solutions

The possibility of developing second layer networks such as networks LightningWhich are located on bitcoins. This update replaces the usual ” timed contracts ” ( HTLCs ) in the Bitcoin blockchain with ” point timed contracts ” ( PLCs ), thereby enhancing the capabilities of the Lightning network. Point- to- time contracts can help implement bilateral Chinese blockchain contracts, and application Oracle Improve payments to facilitate payments.

The Lightning Network has grown unevenly since its launch (in 2018). The taproot can speed up its acceptance. From an investment perspective, increasing the number of potential bitcoin transactions is a positive thing; Because improvements in each specific use of Bitcoin can expand the entire available market and its growth prospects.

Source: Bitcoinvisuals.com

In general, there is good news about the Bitcoin Lightning Network; Among them is the acceptance of bitcoin as the official currency in the country El Salvador (Lightning approval as Bitcoin trading service) as well as announcements of cooperation and financing by Lightning-based payment services such as Strike, Fold and Moon.

Source: Bitcoinvisuals.com

This good news, along with advances in the field of Taproot, is a good sign for Bitcoin as a store of value. The growth of second-tier payment services also has the potential to create another fundamental application for bitcoin. Bitcoin is known as a gold-like digital asset, But its potential as a peer-to-peer digital currency (which can be used in payments) has not yet been realized.

 

What are the potential disadvantages and threats associated with promoting Taproot?

So far, we have talked about the benefits of Taproot and the positive consequences it can have for the Bitcoin network. Now, we come to the part where we talk about the middle ground and the potential dangers of Taproot. Some of these disadvantages are:

Low admission rate

The biggest threat associated with Taproot is that only a small number of users and service providers will accept and implement this upgrade.

The low acceptance rate may indicate that users are not interested in using bitcoin for new purposes and prefer to use digital currencies and other services for new applications.

If users do not welcome Taproot and accept it on a large scale, the hope for the growth of the Bitcoin network will be dashed, and all the doors will be closed on possible updates that could happen in the future.

Some of the features of TheProte can only be operated by the maximum number of users. For example, if a few users accept Taproot transactions, they can easily be attributed to addresses belonging to individuals and companies requiring multi-signature security. In other words, Taproot addresses become traceable, and all that we have said about Taproot security practically loses its use.

Taproot is an upgrade that prominent Bitcoin developers and users support. If this promotion is not accepted by the general Bitcoin users and fails, it indicates a weakness in the Bitcoin community.

As a result, bitcoin may finally give up after years of struggle, and its use as digital money and a means of transferring value may virtually disappear.

Quantum resistance

Ashnor signatures may have less quantum resistance than ECDSA signatures.

Quantum resistance refers to the ability of the Bitcoin protocol to withstand the attacks of quantum computers.

While quantum computers are not currently a threat, they may be a threat in the future. However, it can seem that despite the proliferation, Bitcoin will be equipped with two types of signatures to secure its network.

Users can use ECDSA if Ashnor signatures do not have the necessary resistance against quantum computers. If ECDSA is not appropriate, the protocol can add other signature designs that have more quantum resistance.

The disintegration of the bitcoin community

One of the advantages of consensus-based technologies is that any potential bugs in these networks are carefully considered, ultimately leading to the rejection of a new idea. If this happens to Taproot, in addition to all the losses we mentioned earlier, there will be other potential losses for the Bitcoin network.

The Taproot controversy could lead to a complete breakdown of the Bitcoin network, and part of the digital currency community may decide not to use it anymore.

Bitcoin updates and its slow motion

In this part of the article, we will move away from Taproot and talk about Bitcoin network updates and how to implement them. Having a good understanding of these updates can help us better understand the function of Bitcoin and its current state.

Bitcoin is open-source, and anyone can make suggestions to improve it. Early in the advent of bitcoin, the development of this digital currency became formal through a process called bitcoin improvement proposals (BIPs).

While it is not necessary to know the exact details of the BIP process (due to its highly technical nature), it is not bad to know that BIPs are not very common in general. In particular, compared to other protocols (which sometimes experience major changes), BIPs are more of a small change than a major upgrade.

Since the advent of bitcoin in 2009, a total of 145 BIPs have been recorded; This means that the network experiences an average of 12 BIPs per year.

Atrium, the second-largest digital asset network in terms of market value, has had 342 Atrium Improvement Proposals (EIPs) since its inception in 2015; That means 58 EIP per year. (This small comparison shows that) Bitcoin is moving slower than other digital currencies in terms of technology.

The community of bitcoin developers and users believe that bitcoin ” reliability ” and ” perpetual network activity ” are the most important components of this digital currency.

Of the 145 BIPs registered, only 46 (about 30%) are implemented in the protocol. Eight of these 46 cases (6 percent of them) were merely informative BIPs that pointed to a network design issue or provided general guidance and information to the bitcoin community. In other words, these BIPs have not added a new feature or capability to Bitcoin.

In general, BIPs are run as soft forks; these upgrades are also compatible with older versions of Bitcoin software. In contrast, Atrium has performed several hard forks, during which all users have been forced to upgrade their software versions.

Conclusion

Apart from improving bitcoin, Taproot reminds us that bitcoin is a technology that can change if necessary to improve usability and user experience.

Entrepreneurs motivated by digital currencies continue to develop new currencies and projects that seek to eliminate or replace bitcoin. The success of Taproot indicates that Bitcoin can adapt to new changes.

Reiterating that Bitcoin is a technology, we must add that the world’s number one digital currency is a unique investment in technology for the following reasons:

Bitcoin is liquid

Bitcoin has very high liquidity compared to many of the other venture capital investments we make. For example, buying a portion of the equity of technology companies has much less liquidity than bitcoin.

In the first quarter of 2021, the value of private equity outflows in the United States was $ 162 billion; While the volume of bitcoin transactions reached $ 405 billion.

Source: CryptoCompare

Bitcoin is transparent

Bitcoin explicitly and transparently discloses all ongoing updates, any proposed changes, and any rejected offers. A creative investor can easily step in and personally review the codes, discussions, and processes surrounding BIPs.

If investors do not like the code or the path Bitcoin is heading in, they can comment and suggest changes. There is no other area of ​​investment that provides such transparency about its actions and processes.

The whole market for Bitcoin is stunning.

One of the most important criteria that investors consider when assessing the growth potential of an asset or innovation is the availability of the entire market. The entire market available for bitcoins is stunning; Whether you use it as a technology to settle payments, save value, or global reserve currency. The entire market available for Bitcoin is even larger than the largest public markets in the field of technology.

Bitcoin is approaching one of the biggest updates in its history. This technology update will do; Therefore, investors should also consider these unique features (liquidity, transparency, and total market availability) to evaluate the benefits and risks of this upgrade for Bitcoin (as a technology investment).