After Taproot, What’s Next for Bitcoin’s Future?

Taproot, one of the most important improvements for the Bitcoin network, has finally been activated on November 14th. Although Taproot seems to be just a simple improvement to the Bitcoin protocol, it is a key achievement for the whole Bitcoin network. 

Taproot paves the way to new discussions about Bitcoin’s future and how this blockchain network should get prepared to be widely adopted as a new worldwide currency. Now that 2021 is getting to an end and that Bitcoin passed many difficult tests over the last five years, it is time to analyze what the future could potentially look like for Bitcoin.

Improvements on the Bitcoin network require community consensus. That means that developers and the entire community discuss how the network should expand and grow. Moreover, the activation of a new improvement proposal would also take time after it’s approved by network participants. 

On this article, we will discuss different improvement proposals for the Bitcoin network and the importance of mass adoption of the Lightning Network. 

What is a Bitcoin Improvement Proposal?

As we already know, Bitcoin is based on blockchain technology, which requires consensus in order to operate. Nodes, miners and community members are key parts of the whole consensus process.

A Bitcoin Improvement Proposal (BIP) usually works as a technical improvement proposal that has to be assessed and voted by the community. BIPs are usually presented by community members and developers involved in Bitcoin’s protocol. 

After receiving comments and being analysed by other recognized Bitcoin developers, the BIP is then formally presented to the community. In this way, it receives a BIP number and is published on the Bitcoin Core GitHub repository. That’s the lifecycle of a Bitcoin Improvement Proposal. 

It is necessary for consensus participants to show whether they are in favour or against a specific BIP. This can be done through signalling. This is a practice on which miners show whether they approve or not a new BIP. In order to activate a BIP, a big portion of the miners must show support and then an activation phase will follow generating an upgrade to the Bitcoin network. 

 

Which Soft Forks Could Become a Reality in the Next Few Years?

Bitcoin Covenants

This is one of the possible BIPs that could be discussed and eventually implemented on Bitcoin’s network. 

Nowadays, we know that when we send or receive a transaction, as soon as it gets confirmed, we can do whatever we want with the funds. We can send them to another Bitcoin address, we can hold them or we can also sell them. 

Bitcoin Covenants, instead, would change how we use Bitcoin after a transaction is processed. As described in the paper, Covenants would work as an extension to Bitcoin script language making it possible to restrict how a transfer can be used in the future. Covenants would let developers create new financial instruments and solutions in Bitcoin. Basically, this improvement proposal would restrict how a coin could be spent beyond key ownership. 

Let’s focus on an example of how Covenants could help the Bitcoin network. It usually happens that the Bitcoin network becomes congested. This is something that increases the fees to process a transaction at a given moment. It might be possible for companies and investors that process several Bitcoin transfers to aggregate several payments into a single transaction. Later, as soon as Bitcoin congestion decreases, transfers can be processed. 

The Bitcoin Covenants improvement proposal is represented with BIP 0119.  

Drivechains

Bitcoin Drivechains would make it possible for Bitcoin users to easily send, create, delete and receive bitcoin from different sidechains and second layers in general.  The Bitcoin Drivechain Improvement Proposal is currently represented with BIP 300. 

Although there is no clear decision in the community yet about whether to approve or not these two Bitcoin improvement proposals, it is worth noting that developers continue to work to expand Bitcoin’s functionalities.

 

Bitcoin’s Privacy Enhancements

A paramount aspect about Bitcoin and its future is linked to privacy. There are several privacy-focused cryptocurrencies in the market right now. This shows that there is a clear interest in holding a virtual currency that would offer privacy solutions to users. But how feasible is it to implement privacy solutions on Bitcoin?

When we send and receive Bitcoin, our data is shared by the blockchain network itself. There is information about the funds that we move, the BTC that we hold in our wallets and other sensitive data that could then be linked to our identity. One of the major challenges of adding direct privacy features to the Bitcoin network, is related to the risk of being labelled as a virtual currency for criminals. 

If Bitcoin is then treated as a privacy-focused cryptocurrency, governments could eventually increase their efforts to block or ban it. Centralized cryptocurrency exchanges would also be under pressure from regulatory agencies. Additionally, they could be pressed to lobby against privacy solutions for Bitcoin. This could also create a division in the Bitcoin community between those that want privacy solutions and those that would prefer to avoid them. 

Concerns aside, improvements on privacy have already been activated as Taproot makes complex Bitcoin transactions that require multiple signatures or transactions with delayed release the same as simple P2P Bitcoin transactions. There is no factor or denominator through which one can distinguish between the two different types of transactions via on-chain analytics.  These privacy-enhancing benefits will extend to applications that use time-locked contracts. In addition, and maybe more importantly, the privacy-preserving benefits will also benefit the Lightning Network. The second-layer network that collates Bitcoin transactions together and stores them off-chain, will become more private due to the Taproot upgrade.

 

The Expansion of Second-Layer Scaling Solutions

The Lightning Network (LN) is the most popular initiative linked to Bitcoin’s scalability. As previously discussed, there is an active debate on how Bitcoin should scale. Bitcoin LN infrastructure will probably continue to grow. El Salvador is just the first real world case in which the LN is being adopted by small and large companies as a way to process fast and cheap transactions using BTC. 

The Bitcoin community seems in general to be convinced about the LN and its positive impact on BTC. Several cryptocurrency wallets and exchanges are already offering LN solutions. Time will tell how fast adoption grows.