Bitcoin is gaining more privacy features, especially with increasing concerns about the use of cryptocurrency in the latest wave of ransomware attacks. The most significant update in four years for the software that supports the largest cryptocurrency in the world was adopted quietly last weekend. In recent years, the battles among groups known as "miners" who manage the network have been described as a civil war, resulting in spinoffs like Bitcoin Cash.
While the major advancement makes the network easier to use for some large integrated applications called smart contracts, the so-called "Taproot" update may also allow more people to use privacy wallets and services that make it difficult to know who paid whom. This development could enhance the anonymity features favored by cryptocurrency advocates, which law enforcement agencies often say are used for illegal purposes.
The United States recently linked cyberattacks against Colonial Pipeline and JBS SA, a meat production company, to groups in Russia using cryptocurrency.
Complex Programs
Adam Back, the CEO of the cryptocurrency service developer Blockstream, who helped program the Taproot update, stated in an interview: "Things will be less likely to leave fingerprints, whether it's the use case or the wallet." According to Bitcoin supporters, who have long described illegal use as an exaggeration, the changes can improve how payments are sent to hundreds of people and how derivatives or cryptocurrency bets function on the network.
Today, the vast majority of smart contract applications are created on other networks like Ethereum. The Taproot updates won't make the Bitcoin network a direct competitor since Ethereum offers more activity and features for developers and is easier to use, but it represents a step in that direction and could make the Bitcoin network more appealing to more users and developers. Back added, "In principle, it could allow them to create practical things that are currently very large or complex programs, and thus become expensive," and continued, "It will allow for broader use."
Identifying the exact new applications enabled by the Taproot update may take some time. Nick Carter, a general partner at Castle Island Ventures, said: "Honestly, it will take developers years to figure out how to implement these new types of transactions, but it's definitely a creative space. I see these updates as a sign that Bitcoin can still innovate and upgrade itself."
Minor Effects
The majority of cryptocurrency miners, who verify transactions and are rewarded with Bitcoin, agreed to the Taproot update last weekend, which will be activated initially in November. Fred Thiel, CEO of Marathon Digital Holdings, a Bitcoin mining company that supports the update, explained: "It's clear that we support anything that will increase the demand for new uses of Bitcoin and the Bitcoin network," and added, "What this does is ensure the continued viability of the Bitcoin network and mining operations in the long term."
The Taproot update will be a simple branch, meaning that the update will be backward compatible with previous versions of the software. One of the key features of the so-called "aggregated public key multisig" is that it effectively hides some of the complexities of transactions posted on the Bitcoin network. It not only ensures greater privacy for transactions but also allows for cheaper transactions by reducing the amount of data that gets recorded on the blockchain.
Leading blockchain investigative service firms like Chainalysis and Elliptic stated that they can still ascertain the usage methods. Tom Robinson, co-founder of Elliptic, said that "the Taproot update has a minimal impact on the traceability of Bitcoin. However, there is a push to introduce other privacy-related features to the Bitcoin network, making it harder to trace funds linked to criminal activities. I believe that Bitcoin has been able to grow in recent years, partially due to its traceability easing regulatory concerns regarding its illicit use."
Lower fees could also boost efforts like those by RSK and Stacks, making it easier for developers to create decentralized Bitcoin applications, such as yield services that allow individuals holding cryptocurrency to earn interest on their coins.
