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The evolution of blockchain technology is pertinent as adoption grows. The earliest implementation of blockchain technology needs to be improved upon to meet up with scalability demands such as higher transaction throughputs and faster transaction processing time.
The Bitcoin network, for example, has a transaction processing speed of around 7 transactions per second and a block time (the time it takes to create a new block) of 10 minutes. The vision of blockchain adoption is that it reaches and is used by billions of people all over the world, without limitations. The 7-10 transactions per second rate presents limitations in handling a very large number of concurrent transactions, smoothly. Payment network Visa has reportedly claimed to be able to process an estimated 24,000 transactions per second.
Bitcoin has no central authority because it is open-source and decentralized. Therefore, code changes, new features, and upgrades to Bitcoin are suggested in proposals known as Bitcoin Improvement Proposals (BIPs). The proposals are voted on and approved or declined based on the choice of the Bitcoin community. When approved, upgrades are implemented by a soft fork, or in rare occasions a hard fork, of the blockchain network. A soft fork is different from a hard fork. Soft forks are backward compatible—both miners who have integrated a soft fork software upgrade and those who have not can coexist on the same chain; soft forks allow changes to a blockchain protocol without causing a split of the blockchain. Hard forks split a blockchain into two different chains; they are a radical change to a blockchain network’s protocol. When there is a hard fork, miners on the network choose which chain’s blocks to continue producing.
Two important upgrades to the Bitcoin protocol in recent years are Segwit—Segregated Witness—and Taproot. Both upgrades are soft fork upgrades.
What is SegWit?
The Bitcoin block-size debate has been around for a while. Can the one megabyte (1MB) Bitcoin block size efficiently accommodate transactions in the future as Bitcoin adoption grows?
There have been divisions in the Bitcoin community over how Bitcoin should scale. One such debate is known as the block-size debate. On the one hand, are the “big blockers” — they believe that Bitcoin’s code should be edited to increase the block size, thereby increasing the network's transaction capacity. On the other hand are the “small blockers” who believe that the Bitcoin code and the 1MB block size should remain unchanged to maintain Bitcoin’s security and decentralization.
Segregated Witness (often shortened as SegWit) introduced changes to the transaction format of Bitcoin in a backward-compatible way. Bitcoin's block limit of 1MB transitioned to a weight limit of 4 million weight units (WU) in SegWit. This gives Bitcoin blocks more space for data, which increases transaction confirmation time.
As the name implies, SegWit works by segregating or separating parts of a Bitcoin transaction. Using SegWit, the transaction signature of a Bitcoin transaction is separated from its transaction data. The segregated transaction signature, removed from the main block, is known as the “witness data.”
SegWit enhances the security of the Bitcoin network. Before SegWit, Bitcoin transactions could have their transaction id modified before they were confirmed on the blockchain. SegWit’s segregation of the different parts of a Bitcoin transaction solves the Bitcoin transaction malleability problem.
SegWit introduced a new Bitcoin address pattern. Non-Segwit addresses, also called Legacy Bitcoin addresses start with the character “1”; while SegWit addresses begin with the characters “3” or “bcl”. SegWit is backward-compatible, hence it allows sending to and receiving from non-SegWit Bitcoin addresses.
The successful implementation of the SegWit soft fork has paved the way for other Bitcoin upgrade solutions such as the Lightning Network and Taproot.
What is Taproot?
Taproot has been called Bitcoin’s most significant update in years. The Taproot soft fork upgrade comprises three distinct Bitcoin proposals: BIP 340 (Schnorr Signatures), BIP 342 (Taproot), and BIP 343 (Tapscript). The Taproot upgrade addresses Bitcoin’s privacy, security, and scalability limitations. Taproot brings a new layer of anonymity to Bitcoin. Taproot introduces the ability to add complex transactions to the Bitcoin network through the use of Schnoor Signatures. With Taproot, multiple transactions and signatures can be combined into one, thereby obfuscating a transaction's real origin. These multi-signature and multi-input transactions are cheaper and more efficient. Combining transactions of various input and signature types aids network congestion and reduces transaction space in Bitcoin blocks.
Mega Upgrades, Slow Adoption
Since going live in 2017, Bitcoin’s game-changing upgrade SegWit has seen a steady adoption rate. However, in comparison to the Bitcoin Legacy network’s share of total Bitcoin transaction processes, SegWit seems underutilized. Legacy wallet addresses also hold a larger percentage of Bitcoin.
Why have soft fork upgrades like Segwit and Taproot seen slow adoption despite the benefits of the faster transaction, lower fees, and privacy that they present? Slow adoption can be attributed to a slow rollout of the upgrades by Bitcoin wallet companies and centralized exchanges (CEX).
Most Bitcoin-enabled wallets are yet to integrate SegWit and Taproot. Only a few CEX have integrated support of these upgrades on their platforms. The lack of commitment on the part of these big players to integrate useful Bitcoin protocol upgrades has made adoption slow. These wallet providers and CEX handle the vast majority of Bitcoin transactions.
On the flip side, these wallet providers and CEX that serve millions of customers could be hesitant to introduce these upgrades as the overhead costs to implement them might be huge. The possible temporal disruption that introducing such upgrades might cause on their platform could also be a deterrent.
Research conducted by blockchain and data provider Glassnode earlier this year shows that “a large majority of exchanges has not managed to fully adopt SegWit.”
Some big players have, however, taken the hard path to integrating these upgrades. Kraken, a US-based crypto exchange, has been at the forefront of integrating these Bitcoin upgrades. On December 19, Kraken announced in a blog post that Bitcoin Taproot addresses (Bech32m) are now supported on the exchange. Kraken, as a pacesetter in integrating Bitcoin upgrades, had earlier integrated the Bitcoin Lightning Network in March this year.
Hopefully, other major exchanges and wallet providers will follow suit, making these upgrades reach the level of adoption that they deserve.
To learn more about Bitcoin, visit our Investing in Bitcoin Guide.
Mandela has been a cryptocurrency enthusiast since 2017. He loves coding and writing about emerging technologies. He has an in-depth understanding of distributed ledger technology and the Web3 technology stack. He enjoys researching new cryptocurrency projects.