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VP Trading and Research Sean Rooney breaks down the concept of Taproot.
What is Taproot and what are the implications of this upgrade?
Digital signatures are necessary on the Bitcoin Network in order to verify transactions. Basically, signatures are generated using private keys and then validated against public keys.
Previously, the verification of transactions could be slow, as each digital signature was validated against the public key meaning that complex multisig transactions required extra time and computational power. The Taproot upgrade allows for signature aggregation, meaning that multiple signatures can be organized in such a way where they are condensed together and then verified.
Taproot helps combine single sig and multisig transactions containing many inputs into a single process for verification. This makes it difficult to distinguish the participants of a transaction on the public blockchain, which in turn increases privacy.
Some people have argued that the implementation of layered twos on other protocols such as Ethereum have shown increased innovation in the space with smart contract compatibility. Smart contracts have technically always been a possibility with Bitcoin, however it hasn't been utilized much to date because of issues associated with scaling transactions. Taproot helps solve this.
Some people would point to the lightning Network as the primary scaling solution. Even though the lightning network is absolutely important, lightning transactions still need to be verified on Bitcoin’s network at some point. The batching of those lightning Network transactions can cause congestion on the network when they head for confirmation. The recent upgrade can help alleviate this pressure as well, which is another win for Taproot.
Smart contract compatibility could lead to even more innovative applications of or DeFi type capabilities on the Bitcoin Network.
In addition to the normal single single key spend for Bitcoin, an option has been added for a whole set of different scripts that can also spend. One of the biggest concerns for some Bitcoin holders is private key management, as it is possible to lose access to wallets if private keys are lost. Luckily, Taproot can now give users more recovery options meaning users could potentially set up another multisig back up to avoid losing access to their Bitcoin if private keys and access to a wallet are completely lost.
In summary, the Taproot upgrade is significant because it adds elements of greater transaction privacy, security, and efficiency, as well as the potential for smart contracts to expand capabilities of the already robust Bitcoin protocol.
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