A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor’s Perspective

For many investors, Bitcoin represents a new, exciting and desirable store of value. Bitcoin’s potential to become a store of value has earned it the labels of “gold 2.0” and “digital gold”.

In some ways, Bitcoin is a step up from gold as a store of value. For example, the scarcity of bitcoin is demonstrable, and the cost of storing huge amounts of value in bitcoin is a fraction of that of gold. On the other hand, gold has a 5,000-year lead on bitcoin and is much less volatile. In addition, gold has industrial uses and is in demand for its beauty.

What is completely different from gold is that the Bitcoin network is scalable technology. The gold in the vault will remain gold. Gold cannot be turned into lead, silver, or some improved version of gold. In contrast, the Bitcoin network can change. Bitcoin is an upgradeable technology that can adapt over time to changes needed by users, miners, and developers. on June 12, 2021, enough bitcoin miners said they would support a technology upgrade called the Taproot upgrade. taproot is a package of three upgrades designed to improve network security, privacy, and scalability. taproot is the most important upgrade to the bitcoin network’s most significant upgrade since its activation, with block capacity enhancements 2017 for isolated witnesses.

Expected benefits of the upgrades include.

All types of bitcoin transaction outputs are combined into a single Taproot output, which will improve privacy by making different types of transactions indistinguishable.

Improved bitcoin programmability (so-called “smart contracts”).

Improved data-efficient construction methods by using more efficient signature algorithms and transactions.

Improved security due to the addition of a new signature scheme, making it a dual-signature blockchain.

It is not without risks, which include.

Low adoption rates indicate that Bitcoin users are not interested in using Bitcoin for anything new.

Low adoption rates negate potential privacy benefits.

The new signature scheme is likely to be less “quantum resistant” than the current scheme.

Potential split in the Bitcoin community due to disagreement over Taproot

Upgrade – similar to the controversy that led to Bitcoin Cash’s quarantine witness.

We will expand on these benefits and risks in the report to provide context for Bitcoin as a technology investment. In addition, we will discuss how upgrades have historically been implemented on the Bitcoin network.

Taproot Upgrades
The Taproot upgrade consists of three separate Bitcoin Improvement Proposals (BIPs): 340, 341, and 342.

In short, Taproot aims to improve Bitcoin’s security, privacy, and efficiency.

Taproot will implement these improvements by.

MAST changes the way spending conditions are structured by reducing the required inputs, thereby reducing the data footprint of each transaction.

Pay-to-Taproot produces a single “Taproot” output on the Bitcoin network, regardless of transaction type, improving transaction privacy and efficiency.

The Schnorr signature replaces the current cryptographic signature scheme called ECDSA (Elliptic Curve Digital Signature Algorithm).

These three BIPs are being implemented together to encourage wallets and service providers to update their software only once to maximize adoption of the full suite of software, thus improving Bitcoin for as many users as possible.

Benefits of Taproot
Taproot will expand the availability and potential market size of Bitcoin. Quantifying the growth is difficult, but the overall benefits are as follows.

Rich Application Development

Bitcoin is typically not associated with smart contracts, which are automatically executed digital contracts whose terms and execution are written in code or script form. In contrast, the ethereum blockchain is typically associated with smart contracts and the development of blockchain-based applications that use them.

Bitcoin does, however, have native smart contract functionality. Bitcoin transactions can be programmed to time payments when certain limits are met or missed. Bitcoin smart contracts are currently used in multi-signature wallets to enable the lightning network and “lock” bitcoin units to ensure they remain unused for a period of time.

For now, creating these specific Bitcoin contracts is cumbersome and expensive.

In addition, if users want to send complex bitcoin transactions, they must invest the impact of the scripts in each transaction input. When these scripts are executed, all conditions, including those that are not met, are displayed. As a result, the volume of transaction data involving bitcoin contracts is large and not conducive to privacy protection. Taproot will make on-chain smart contracts more feasible by breaking down the execution of bitcoin scripts so that only the executed scripts are revealed.

Taproot also improves the availability of discreet logging contracts (DLCs) that can be used to build bitcoin smart contracts. Notoriously, two Bitcoin founders, Nicolas Dorier of BTCPay Server and Chris Stewart of Suredbits, joined the DLC in 2020 to bet on the outcome of the US presidential election. With Taproot, DLC will have a smaller on-chain footprint, thus encouraging smart contracts on Bitcoin.

All in all, smart contracts, touted by many as flexible and revolutionary, are currently so difficult to implement on Bitcoin that they cannot be popularized. So while Taproot will make Bitcoin smart contracts more feasible, we won’t see the rise of Bitcoin decentralized applications (dapps) and decentralized autonomous organizations (DPOs) featuring the ethereum blockchain anytime soon. Instead, we are more likely to see simple bitcoin smart contracts in insurance payouts, residential real estate transactions, or financial pension products that represent meaningful growth opportunities, such as

Life insurance payments could be programmed with certificates or something similar upon receipt of satisfactory death information – with over $760 billion in spending in the US in 2019.

Residential real estate transactions can trigger final settlement when the seller’s bank acknowledges receipt of the mortgage balance – 5.8 million residential real estate units sold in the U.S. in May 2021, with a seasonally adjusted annual median price of about $350,000.

Financial pensions can be programmed to pay out over a specified period of time – U.S. pension assets exceed $3 trillion in 2020.

Bitcoin’s access to these markets is unclear. The most obvious factor may be a customer request to pay all or part of their benefits in bitcoin. Finally, insurance companies that issue life insurance and sell pension products represent some of the most conservative, predictable risk profiles in the financial world, as they were founded in the mid-1800s with a philosophy of “perpetuity. If these companies succumb to any customer demand to enter the digital asset and blockchain market, it is more likely to come in the form of a bitcoin-related venture. Bitcoin is a more conservative and predictable blockchain from a technical perspective than ethereum (see the “Upgrade Activation” section below). In addition, it is more like gold and cryptocurrency than any of its competitors, and therefore has a more obvious grasp of its value proposition. What’s more, insurer MassMutual has invested in Bitcoin and Bitcoin companies.

Data Efficiency

Schnorr signatures will improve the efficiency of signer transactions. a Schnorr signature is 64 bytes (digital information units) compared to 71-73 bytes for ECDSA signatures, which will result in an approximate 11% increase in efficiency per transaction. There is no guarantee that Taproot-enabled transactions will be adopted by the network: users are free to stick with Bitcoin’s traditional transaction technology. However, if Taproot transactions are adopted, fewer resources are required to run validated transactions and maintain one of the network’s full nodes. This encourages users to run their own full nodes, thus improving the decentralization of Bitcoin.

Bitcoin’s decentralization makes it license-free and censorship-resistant, two key features of its value proposition. A worsening of decentralization would weaken Bitcoin and could significantly damage its value. The number of lost nodes may not be a problem for the network if there are still enough nodes in operation. This number is not known, but in reality the number itself does not matter. What matters is that users who are making meaningful transactions on the Bitcoin network are checking transactions with their own nodes and that there are enough nodes to provide blockchain downloads for new nodes. This is similar to the mining arithmetic of the Bitcoin network, where more arithmetic is “better”, but less arithmetic is not necessarily “worse”, until some unknown threshold is reached.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

Figure 1

In addition, since the Schnorr signature is a signature scheme with less data, Taproot may increase the average number of transactions that can be included per block. This, in turn, may reduce transaction fees for users.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

Figure 2

However, transaction costs fluctuate widely (see Figure 2), depending on a range of influencing factors. We can say that when it comes to more complex multi-signature or time-locked transactions, it is almost certain that Taproot will make these specific fees significantly lower.

Improved wallet functionality, usability and privacy

Taproot aims to improve the functionality of multi-signature wallets. Multi-signature wallets are wallets that require multiple signers to unlock funds, which makes them more secure than single-signature wallets. taproot aims to improve the data efficiency of these transactions. There is also a privacy upgrade here. taproot transactions will mask the spending conditions of multi-signature wallets. Currently, multi-signature wallets on Bitcoin are built using smart contracts. As mentioned above, bitcoin smart contracts currently display all spend conditions every time a transaction occurs.

For example, the display condition for a multi-signature wallet could specify that the transaction must be signed by three of the five valid signatures or a master signature. Even if the master signature is never used, the blockchain can leak the public address associated with the master signature in every transaction, posing a potential security threat.

Taproot patches this in two ways.

The potential expenditure of funds is not revealed when funds are transferred.

Because Pay-to-Taproot makes all transaction output look the same, no one knows if the company is using multiple signatures.

While Taproot improves privacy, it does not make Bitcoin blockchain forensics impossible. Bitcoin will remain an anonymous network with a publicly audited digital file trail. Bitcoin will not be a privacy coin with Taproot like Monero or Zcash, and it will be less private than cash.

The chart below (Figure 3) shows the number of bitcoins held in multi-signature wallets since 2018. It has grown by about 55% since 2018, but has stagnated since hitting an all-time high in July 2019. The lackluster growth of the past two years may be stopping us in our tracks. If Taproot is widely adopted, we may see the adoption of multi-signature solutions by privacy-conscious individuals and companies. On the other hand, the slow or even zero growth of multi-signature wallet balances in recent years suggests a possible lack of demand for the feature. It is also worth noting that this type of analysis will not continue using Taproot, as the transaction outputs all look the same.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

Figure 3

Finally, Taproot will support the use and construction of wallet solutions and signature schemes that are built on top of the Schnorr signature feature (i.e., “linear”), which means that signatures can be combined. An example of this is that it is now feasible to create a multi-signature wallet that requires three signatures over time, but only two signatures if the funds remain intact over time.

Advances in Layer2 Scaling Solutions

Taproot allows for improvements to Layer2 networks such as the Lightning Network, which sits on top of Bitcoin. Taproot will upgrade the Lightning Network functionality by replacing the Hash Time Locked Contract (HTLC) with a Point Time Locked Contract (PLTC). The Lightning Network is a business-oriented service that allows parties to conduct bitcoin transactions faster and cheaper. Using PTLC means that payments will be routed using regular public keys, providing privacy features similar to those designed for multi-signature wallets.PTLC also enables blockchain escrow conditions and improves the use of prophecy machines to facilitate the ease of payments.

The development of the Lightning Network has been uneven since its launch in 2018. taproot could accelerate adoption. From an investment perspective, the increase in Bitcoin transactability is positive, as improvements to any given use case will expand its potential market size and growth prospects.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

Favorable factors for the Lightning Network include the acceptance of Bitcoin in El Salvador (using the Lightning Network as a Bitcoin business service), as well as financing and partnership announcements for payment services that support the Lightning Network, such as Strike, Fold and Moon.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

These favorable factors, along with Taproot’s improvements, should bode well for bitcoin as an investment. the growth of Layer2’s payment service has helped establish another core use for bitcoin. Bitcoin has become a digital asset similar to gold, but its potential as a peer-to-peer digital currency is currently unrealized.

Potential Drawbacks and Threats of Taproot Upgrade
The biggest threat associated with low adoption of Taproot is the potential for only a small number of users and service providers to adopt and implement the upgrade.

The low adoption rate of the highly anticipated upgrade may indicate that most users are not interested in using bitcoin for anything new. For new uses, Bitcoin users may prefer a different cryptocurrency or service.

Users avoid upgrading Bitcoin to make it more flexible, reducing Bitcoin’s growth prospects as it closes the door to potential future upgrades.

Some of Taproot’s privacy features are only available to the crowd: if few users employ Taproot transactions, it is easy to determine that these addresses belong to entities that require multi-signature security.

Rejecting Taproot would highlight the weaknesses of the Bitcoin community if updates supported by developers and vocal users fail.

What does the lukewarm acceptance of Taproot mean for the future of Bitcoin? Will Bitcoin succumb to its digital gold narrative as its primary value proposition? If so, chances are Bitcoin will never become a reliable peer-to-peer digital cash or software development platform. This does not necessarily prevent Bitcoin from fulfilling its potential as “digital gold”.

Quantum Resistance

The Schnorr signature may also prove to be less “quantum resistant” than ECDSA. Quantum resistance refers to the ability of the Bitcoin protocol to resist attacks by quantum computers. While quantum computers are not known to be a threat now, they may become a threat in the future. However, with Taproot, Bitcoin will have two signature types to protect the network. If the Schnorr signature is not resistant to quantum attacks, then users can use ECDSA. if ECDSA is not appropriate, the protocol can add other quantum signature schemes.

Bitcoin Community Splits

One of the benefits of technologies that rely on consensus to bring about change is that any perceived shortcomings are magnified and can lead to rejection of new ideas. This is another potential drawback of Taproot. If Taproot activation becomes controversial, then the Bitcoin network could split, with parts of the community deciding not to use Bitcoin anymore.

Activation Escalation

While the details of Taproot itself are crucial for investors, it is also important to cover the typical recommendations and implementation of Bitcoin upgrades to fully understand the current situation. Since Bitcoin is open source, anyone can suggest improvements. The improvement process was formalized early in Bitcoin’s history through a process known as the Bitcoin Improvement Proposal (BIP). While the finer details of the BIP process are not important for an in-depth understanding, as they are highly technical, we should note that BIPs are typically uncommon, especially when compared to other protocols, and that BIPs are typically minor tweaks rather than extensive upgrades.

Bitcoin has been slow to develop
Since Bitcoin’s inception in 2009, a total of 145 BIPs have been filed, an average of about 12 per year. By comparison, ethereum, the second largest digital asset network by market capitalization, has submitted 342 EIPs (ethereum improvement proposals) since its inception in 2015, an average of about 58 per year. From a technical perspective, Bitcoin has been slower to evolve than other cryptocurrencies.

The Bitcoin developer and user community has emphasized reliability and uptime as one of the more important aspects of Bitcoin. Of the 145 BIPs submitted, only 46 (about 30%) have been incorporated into the protocol. Not to mention, 8 of them (~6%) are informational BIPs that simply describe a design problem or provide general guidance or information to the Bitcoin community, but do not propose new features. In general, BIPs have been implemented as soft forks, meaning that upgrades will remain backwards compatible with outdated versions of Bitcoin software. In contrast, Ether has multiple hard forks that force all users to upgrade.

Summing up
In addition to improving Bitcoin, Taproot reminds people that Bitcoin is a technology. It has the potential to change as needed to improve usability and user experience. Inspiring entrepreneurs will continue to develop their own version of the Bitcoin killer. If Taproot is successful, it will prove that Bitcoin can adapt.

While reminding people that Bitcoin is a technology, we should add that Bitcoin is a unique technology investment for the following reasons.

Bitcoin is liquid

Venture and growth equity investments in technology companies lack liquidity, especially when compared to bitcoin. As a point of reference, the value of U.S. private equity exits in the first quarter of 2021 was approximately $162 billion, while bitcoin traded at approximately $405 billion.

A Comprehensive Insight into Bitcoin Taproot Upgrade from an Investor's Perspective

Bitcoin is Transparent

Bitcoin provides full transparency into the upgrades being implemented, proposed and rejected. Enterprising investors can access and engage in self-audits, code and conversations around the BIP. If investors don’t like the code or direction of Bitcoin, they can make their comments public and suggest changes directly. No other investment offers such a level of transparency for day-to-day operations.

The Potential Market Size of Bitcoin (TAM)

Investors view TAM as a proxy for the potential growth potential of an investment, as long as it can be captured. Bitcoin’s TAM is staggering, depending on whether you view Bitcoin as a technology for payment settlement, value preservation, or a global reserve currency, for example. Bitcoin has the largest TAM, more than any other technology investment. This is true even when compared to the largest publicly traded companies.

As Bitcoin approaches one of the largest technology upgrades in its history to date, investors evaluating the risks and rewards inherent in Bitcoin as a technology investment must keep in mind to keep these unique characteristics in mind.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a-comprehensive-insight-into-bitcoin-taproot-upgrade-from-an-investors-perspective/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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