Can Schnorr and Taproot Impact Bitcoin Price? An Expert’s Take
Schnorr and Taproot soft forks are now official and likely to be activated soon. Both are aimed at increasing Bitcoin’s scalability and privacy of users. The numbers of their respective Bitcoin improvement proposals are BIP-340, BIP-341, and BIP-342.
The Schnorr/Taproot proposal is now published as BIPs 340, 341, and 342; see https://t.co/33uiulO8RA
Note that the assignment of BIP numbers is not any kind of stamp of approval; it just means the process was followed (which includes some amount of public discussion).
— Pieter Wuille (@pwuille) January 24, 2020
To help us better understand the repercussions the upcoming changes will have on the community, we have talked to Stephan Gershuni, a crypto-enthusiast and a blockchain evangelist.
What Does It Mean for Bitcoin and Why Is It Important?
Schnorr signatures have some clear advantages over the current system. Most importantly for Bitcoin users, they allow you to aggregate a string of public keys and of private keys into a single Schnorr signature (threshold signature), which in turn can then be used as a key. And the sum of aggregated public and private keys will still match.
Using the Schnorr signature, you will be able to create a multisig transaction without any scripts. This ultimately reduces transaction size. Secondly, multisig transactions will be indistinguishable from normal transactions. This obviously improves user privacy.
The second important proposal is Taproot. It is a technology used for signing transaction keys. It increases flexibility and allows you to come up with smart contracts of varying complexity. At the same time, Taproot will help make all transactions look exactly the same on the blockchain explorer, which is another big step to increase user privacy.
Why These Specific Changes?
Developers of most other blockchains prioritize money-making. The Bitcoin Core team has different priorities. I think they can be summed up in two points.
- Bitcoin should be a censorship-resistant money transfer system. When you access and spend your money, no one in the world should be able to identify you. Ideally, no one should know how many Bitcoins you have in your account and what you do with them. For those who need transparency, there is a banking system. For those who need privacy, there is Bitcoin.
- The second priority is scalability. All people and devices on Earth should be able to use Bitcoin at any moment. Bitcoin has to eventually have enough bandwidth for billions of people and devices.
The BIPs at hand are meant to help with these two problems.
Why Didn’t Bitcoin Use Schnorr Signatures Earlier?
Schnorr signatures are simpler and even older than other types of signatures used in Bitcoin. It is a cryptographic signature system that appeared earlier than DSA or DSA algorithms.
It seems that the only reason why it was not used in Bitcoin initially was that it was covered by a patent that only expired in 2008. At the time when Satoshi started writing the Bitcoin code, most likely, Schnorr signatures could not be used for free. So it was easier to use free solutions.
Will These Soft Forks Influence Bitcoin’s Price?
I don’t know if the price will go up or down. We understand how the price fluctuates reacting to some exchange being hacked or a chairman of a central bank making a big announcement. But this is a much more fundamental event because it will affect the development of the Bitcoin network in the future.
Will These BIPs Cause Mass Adoption?
Mass adoption is a term beloved by traders who are waiting for Bitcoin’s price to go up.
I do not think that Schnorr and Taproot will change the situation dramatically. They will have less impact on blockchain’s performance than SegWit. Even though they might have a greater effect on Bitcoin in terms of privacy, there’s nothing new in that as well.
Conversely, if Bitcoin really becomes trustless and censorship-resistant, most large economies will perceive it as a means through which any citizen can access the black market and corrupt officials can steal or launder money. And this money can not be traced and proved in court. In this case, the only logical step for most governments would be to outlaw Bitcoin.
What happens next?
Merging the BIP-340, 341, and 342 into Bitcoin’s code is just the beginning. The next step is activating this code. So far, no one knows how this will happen.
The last time it’s been more than a year from the moment the code was accepted to the activation. And that was SegWit.
First, there was a vote. This whole voting business lasted for almost a year but was inconclusive. Then there was the notorious New York meeting of top miners. None of these steps worked.
Back then it was unclear how to make decisions in a decentralized system if voting did not work. What did we learn since adopting SegWit? We discovered democratic solutions don’t exactly work in decentralized systems, and that the people who are economically interested in Bitcoin—full node owners, merchants, miners—just end up making a decision and enforcing it for the entire network.
It seems that the introduction of Taproot and Schnorr proposals may take a while. On the other hand, the SegWit experience suggests that the Bitcoin network stakeholders may take matters in their own hands and accelerate the process if they want to.
When introduced, the new BIPs are unlikely to have a massive effect on the Bitcoin price. They, however, may drive regulators to consider outlawing Bitcoin altogether because they will seriously enhance the privacy of the first cryptocurrency, which contradicts their fundamental interests. And this seems the biggest risk inherent in those proposals.
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