Bitcoin (BTC) Taproot Upgrade Will Lead to Lower Fees, Improved LN Efficiency, Smart Contract Functionality: Report

On November 14th, 2021, block height 709,632, Bitcoin’s (BTC) Taproot upgrade was activated.

This critical update brings with it several important enhancements to the overall flexibility, security, and efficiency of BTC transfers. And as Bitcoin’s first protocol upgrade in more than 4 years, it’s a very significant milestone in the development of the permissionless network.

Blockchain analysis firm Chainalysis has published an outline of the Taproot upgrade, what it aims to change, and how it will be affecting the BTC network as we move forward.

Three Interconnected Upgrades, Deployed At One Time

The Taproot update is an umbrella term that refers to 3 interconnected Bitcoin Improvement Proposals (BIPs) set to activate simultaneously:

BIP 340, or Schnorr. This proposal introduces Schnorr signatures, which are a digital signature scheme that is “faster, more secure, and less data-intensive than the cryptographic method currently in use (Elliptic Curve Digital Signature Algorithm, or ECDSA).”

BIP 341, or Taproot. This proposal “defines Pay-to-Taproot (P2TR), a new way to send bitcoin that enhances privacy and flexibility for users.” It also “implements Merklized Alternative Script Trees (MAST), which compress complex Bitcoin transactions into a single hash.” This “reduces transaction fees, minimizes memory usage, and improves Bitcoin’s scalability.”

BIP 342, or Tapscript. This proposal defines Tapscript, an update to Bitcoin’s original scripting language that “enables P2TR transactions, leverages Schnorr signatures’ improved efficiency, and allows for more flexible upgrades going forward.”

Taproot adoption timeline

On June 12, 2021, these upgrade proposals had managed to achieve a 90% consensus among miners, “thus locking in their November activation as a soft fork to Bitcoin’s protocol,” Chainalysis noted in a blog post. As a soft fork, the Taproot upgrade is “backwards compatible with older versions of bitcoin and does not create a separate, parallel blockchain, as was the case with Bitcoin and Bitcoin Cash,” the blockchain firm explained.

Adoption of taproot is “expected to grow slowly over a period of years, just as it did with SegWit, the last major Bitcoin upgrade,” the Chainalysis team added.

They also mentioned that 2 years after SegWit’s activation, approximately 50% of transactions used it; today, four years after, that proportion has notably reached 80%. The primary reason for this relatively slow rate of adoption is that crypto wallets and service providers “choose to opt-in on their own schedule.”

Taproot’s impact

The Taproot upgrade should enhance Bitcoin in several ways, including:

  • Lower fees: Since the data size of complex transactions will be reduced, “transaction fees will decline proportionally.”
  • Improved lightning network efficiency: Taproot will make transactions on the Lightning Network “cheaper, more flexible and more private.”
  • Enhanced smart contract functionality: With Taproot, Bitcoin will be able to “host smart contracts with any number of signatories while retaining the data size of a single-signature transaction.” This “lays the technical foundation for DeFi on the Bitcoin network.”

As noted by Chainalysis, the Taproot upgrade is “a massive improvement to the Bitcoin protocol.” Lightning network improvements and “expanded smart contract capabilities will improve bitcoin’s utility; meanwhile, lower transaction fees and increased network speed will improve its scalability.”

For this reason, Chainalysis says it is quite pleased to “welcome BIP 340, 341, and 342 at block height 709,632 and beyond.”

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