Footprint | Will Bitcoin's Taproot Upgrade Be Timely Rain?

Taproot's performance on the Bitcoin network still needs time to verify

• Author: Footprint analyst Sabrina
• Date: November 2021
• Data Source: Footprint Analytics

The long-awaited Bitcoin BTC upgrade Taproot took effect on block 709,632 on November 14, 2021.

Whether this upgrade can bring about significant changes to the Bitcoin ecosystem and enhance Bitcoin's competitiveness as a public chain, the author believes it is unlikely to have an immediate impact.

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Unlike Bitcoin's upgrade in 2017, known as the "last civil war," where ideological disputes among Bitcoin believers led to strong divisions, Taproot received support from almost universal 90% of the hash rate. This is a rare moment of consensus among stakeholders in the cryptocurrency world.

However, despite the fact that Bitcoin's upgrade has been activated for 3 days now, compared to Ethereum's (ETH) London upgrade on August 6, 2021, it seems that it has not generated as much market attention as expected. At least, there have been no significant changes in BTC's price and trading volume.

Footprint Analytics: After the completion of the Taproot upgrade on November 14, 2021, there were no significant changes in BTC's price and trading volume

Footprint Analytics: After the London upgrade on August 6, 2021, the price of ETH surged from 2.8K to over 30K

What is the Taproot Upgrade

Bitcoin updates its network through soft forks periodically, mainly by introducing new features to Bitcoin through Bitcoin Improvement Proposals (BIPs).

Unlike previous upgrades, the Taproot upgrade is not a single feature enhancement for the Bitcoin network, but an upgrade that combines three improvements in technology. It includes three BIPs: BIP340, BIP341, and BIP342.

Greg Maxwell first proposed the upgrade improvement in 2018. Subsequently, Pieter Wuille, Tim Ruffing, AJ Townes, and Jonas Nick wrote the three Bitcoin Improvement Proposals (BIPs) that were incorporated into Taproot and merged into Bitcoin Core in October 2020.

The Taproot upgrade aims to enhance the transaction privacy and efficiency of the Bitcoin network.

Contents of the Proposals

• BIP340 introduces Schnorr multi-signatures, compatible with existing elliptic curve digital signatures.
• BIP341 combines the characteristics of aggregated signatures and proposes a new network payment method called "Pay-to-Taproot" (P2TR) using the Merkleized Abstract Syntax Tree (MAST) data structure.
• BIP342 improves the Bitcoin network's scripting language by adding a new Tapscript scripting language to assist in verifying Schnorr aggregated signatures and Pay-to-Taproot payment paths, enhancing the inclusivity and flexibility of P2TR and providing room for future upgrades in smart contracts on the Bitcoin network.

Impact on the Ecosystem

Lower Fees

• One of the main advantages of Schnorr signatures is their ability to aggregate multiple keys and produce a unique signature in complex Bitcoin transactions. This means that signatures involving multiple parties can be "aggregated" into a single Schnorr aggregated signature. It is considered the most significant technical update after Bitcoin SegWit.
• Schnorr signatures reduce the amount of data required for multi-signature transactions. Therefore, the processing cost of transactions will decrease, thereby reducing transaction fee costs.

Enhanced Privacy

• MAST data structure based on Schnorr multi-signatures can contain complex transaction information. It will allow multi-signature transactions or transactions involving multiple addresses to appear as standard single transactions.
• As multi-signature transactions cannot be distinguished from simple transactions, addresses involved in multi-signature transactions will receive better anonymity and privacy protection.

Support for Smart Contracts

• With the Taproot upgrade reducing transaction outputs on the network, it provides the possibility to deploy complex smart contracts.
• Developers can use an extensible toolset to develop on Bitcoin.

Summary: The core of the Taproot upgrade lies in Schnorr signatures. Based on the signature algorithm, it brings new combinations and possibilities for performance, privacy, and smart contracts to Bitcoin.

Can Taproot Enhance BTC's Competitive Advantage?

Although both Bitcoin and Ethereum networks are based on decentralized ledgers and cryptographic concepts, they differ greatly in technical specifications.

For example, Bitcoin acts as a digital equivalent of gold for storing value, while Ether is used to power the Ethereum network and its applications.

One of the main differences between Bitcoin and Ethereum is that Ethereum supports and is suitable for smart contracts, providing developers with a way to create new applications. Today, Ethereum dominates as the preferred blockchain for these applications, also known as "dApps."

Footprint Analytics: The number of DeFi protocols on Ethereum increases monthly

Currently, most decentralized finance (DeFi) and many non-fungible token (NFT) applications such as trading markets, GameFi, and the metaverse are built on the Ethereum network.

With the increasing transaction volume of DeFi and NFT, Ethereum's usage is becoming more widespread. Ethereum will accumulate its first-mover advantage in the application of cryptographic technology and ecosystem building.

Footprint Analytics: Top 10 ETH burns on Ethereum, including DeFi & NFT

Although Ethereum has a certain advantage in transaction volume and ecosystem, Bitcoin's monetary functionality and stable, secure network also attract liquidity that stays on the network for the long term.

Similar to gold, Bitcoin is stable and has a limited supply of 21 million coins, and its role as a digital gold savings value is increasingly recognized.

The Taproot upgrade of Bitcoin makes the Bitcoin network more attractive for building DeFi protocols, and these protocols may attract incremental demand for Bitcoin. Many Bitcoin followers believe that this upgrade is a timely rain for the Bitcoin network.

However, many observers also question whether Taproot is technically in line with the idea of "DeFi on Bitcoin" or "smart contracts on Bitcoin."

Bitcoin's initial positioning is for payments. As a programmable platform, attracting more dApps or DeFi projects to program on its chain and build projects, Bitcoin currently lacks a mature operational environment for running smart contracts: Ethereum Virtual Machine (EVM) to support smart contract storage, execution, and verification. The road to developing a DeFi ecosystem on Bitcoin is still long.

Looking back on Bitcoin's development over the past decade, progress has been very slow. There are too many ideological factions, making it difficult to reach a consensus. Coupled with its PoW consensus mechanism, functional iterations progress extremely slowly. Currently, it cannot keep up with the rapidly evolving development pace of DeFi on the chain.

The upgrade vision is promising, but so far, only slightly more than half of the known Bitcoin nodes have indicated support for the upgrade, while the remaining nodes are running old software, meaning they cannot yet enforce Taproot's new rules. The actual activation of Schnorr will also not start until next year. The performance Taproot brings to the Bitcoin network will take time to verify.

Disclaimer: The content of this article represents only the views of Footprint, is for reference and information purposes only, and does not constitute any investment advice.

About Footprint Analytics

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