Bitcoin is set to get an upgrade after four years — it promises more privacy and better smart contracts

• Bitcoin's Taproot update is the first major upgrade to cryptocurrency's code since the SegWit update four years ago in 2017.
• Taproot consists of three Bitcoin Improvement Protocols (BIPs), which will introduce more privacy, better smart contracts and cheaper transaction costs to the network.
• Taproot was formalised in June, earlier this year, when 90% of the miners on Bitcoin’s network reached a consensus to push the proposal through.

Bitcoin, the world’s first and most valuable cryptocurrency, is set to get a makeover in six days. According to taproot.watch, a tracker developed by blockchain developer Hampus Sjöberg, the Taproot upgrade for the Bitcoin network is six days away. It was formalised in June, when 90% of the network’s miners accepted it. Like Ethereum’s London Hard Fork back in August, this too is basically a change to the code in Bitcoin’s underlying protocol.

Taproot isn’t just a single update. Rather, it is a combination of three different Bitcoin Improvement Protocols (BIPs) — BIP 340, 341 and 342. The Bitcoin Improvement Protocol is a formalised system of improving the Bitcoin protocol, undertaken by the community with consensus from miners. It has been responsible for big changes like 2017’s SegWit, which was the last big update to Bitcoin to help the cryptocurrency scale. It enabled the Lightning Network to be launched on top of the Bitcoin protocol.



So four years down the line, how will Taproot change the way Bitcoin operates?

Bitcoin promises to offer better smart contracts

The Bitcoin network does have smart contracts right now, but they’re virtually useless on the platform. Unlike Ethereum, Cardano or Solana, using smart contracts on Bitcoin increases the transaction fees and the total size of data on the Bitcoin network. One of the ways Taproot addresses this problem is by moving from the current Elliptic Curve Digital Signature Algorithm (ECDSA) to the Schnorr Signature Algorithm (SSA).

With SSA multiple transactions done to a Bitcoin wallet don’t need to show up separately. Instead, they can be hashed under one transaction and assigned an unique key, which can be useful for streamlining various applications, like creating Bitcoin based funds where transactions happen from multiple parties to one wallet.

Cheaper transactions on Bitcoin

In addition, when smart contracts are used, a system called Merklized Alternative Script Trees (MAST) will come into play. With this, conditions placed on a transaction can all be condensed into one script, which means they will take up less data. This is what signifies smart contracts even more, since under the current system each condition is hashed separately, which increases the total storage on the blockchain and in turn inflates the transaction fees. Lower fees means more merchant adoption and more adoption.

At the moment, the Bitcoin network can handle about four to five transactions per second, and transaction fees can swell to $75 or more. We don’t know how much cheaper they’ll be after Taproot, but they promise to be cheaper.

“Taproot matters, because it opens a breadth of opportunity for entrepreneurs interested in expanding Bitcoin’s utility,” Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark, told CNBC in June.

This could open the doorway to Bitcoin entering the world of decentralised finance (DeFi) and non-fungible tokens (NFTs) in a more meaningful way. Perhaps, even challenging the front-runner, Ethereum.

Bitcoin will offer more privacy

You would have often read publications like ours citing data from blockchain tracking firms. Bitcoin’s public system was a boon when it began, but it also made the network less private in a way. As more crypto adoption happens worldwide, the need for privacy has grown. Blockchain-based systems need to make it more difficult to track transactions based on public wallet addresses.

SSA’s bundling system means that while tracking algorithms will be able to see what transactions have happened, it won’t be as easy to detect who’s sending BTC where. In a way, it makes Bitcoin more like cash transactions in our current banking systems.

Further, in the smart contract system, transactors will have access only to the condition they’re fulfilling. So, if a transaction has multiple conditions for fulfilment, and can be fulfilled as long as any one is met. The person making the transaction will know only the condition they have fulfilled instead of knowing every condition that was set in the first place, which is what happens now.

This can be useful for building apps on Bitcoin, where these conditions might initially be a key part of a developer’s intellectual property.

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