Blockchain Technology: Prospects and Challenges

Taproot upgrade in Bitcoins


From UPSC perspective, the following things are important :

Prelims level: Taproot upgrade in Bitcoins

Mains level: Cryptocurrencies regulation in India

Bitcoin went through a major upgrade that enables its blockchain to execute more complex transactions, potentially widening the virtual currency’s use cases and making it a little more competitive with Ethereum for processing smart contracts.

What is the new upgrade?

  • The enhancement, called Taproot, is the most significant change to the bitcoin protocol since the SegWit (Segregated Witness) block capacity change in 2017.
  • SegWit effectively increased the number of transactions that could fit into a block by pulling data on signatures from bitcoin transactions.
  • Smart contracts are self-executing transactions whose results depend on pre-programmed inputs.

What is Taproot?

  • The Taproot upgrade consists of three separate upgrade proposals.
  • However, at its core, the upgrade introduces a new digital signature scheme called “Schnorr” that will help bitcoin transactions become more efficient and more private.
  • Schnorr can also be leveraged to let bitcoin users execute more complex smart contracts.

When was Taproot officially activated?

  • Taproot was officially activated on block 709,632.
  • Blockchains settle transactions in batches or blocks.
  • Each block can contain only a certain number of transactions.

What is its impact on Bitcoin?

  • The biggest impact would be the bitcoin network’s ability to process more smart contracts, similar to what Ethereum does.
  • Bitcoin has historically been much more limited in processing smart contracts compared with Ethereum.
  • Taproot increases privacy by obscuring what type of transaction is being executed.

What are the other enhancements?

  • The Schnorr signatures can make more complex transactions on the bitcoin protocol, such as those from wallets that require multiple signatures, look like just any other transaction.
  • This makes transactions more private and more secure.
  • Bitcoin transactions will also become more data-efficient, optimizing block capacity and leading to lower transaction fees.

What does Taproot mean for investors?

  • Large-scale upgrades have paved the way for the next phase of innovation in the bitcoin network.
  • The last major upgrade in 2017 helped launch the Lightning Network, which facilitated much faster and cheaper bitcoin payments than before.
  • Taproot to lead to a similar wave of innovation in bitcoin centered around smart contracts.

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