Bitcoin is the premiere cryptocurrency since it was first launched in 2009. It is the first successful implementation of blockchain technology which solves the double-spending problem in digital currency systems. It maintains market lead in early 2021, but there are threats to its dominance.

There are valid criticisms against its design, which has changed very little since it was first released. Among the criticisms of Bitcoin are its lack of scalability and user privacy. The core developer community is going to address these issues with coming upgrades by the end of 2021, particularly to resolve the scaling and privacy concerns.

An Introduction To Bitcoin's Scaling Issue

Networks like Bitcoin face a trilemma when it comes to scalability. As a decentralized network, you cannot fully scale without being more centralized. Decentralization brings with it security, but not more scalability. Despite that, the purpose of Bitcoin is to remain a decentralized system that does not require permission from authority to make payments. The advantage traditional payment systems have is a centralized network of servers that are operated by an institution (e.g. VISA, Mastercard). They require the authorization of the institution for making payments. There is faster processing because the transaction can be validated by the institution rather quickly. Bitcoin, since it is a decentralized network, will require a consensus from the entire network before a transaction can be validated.

Bitcoin is also limited by its block size. The maximum block size was set to 1 MB, which limits the number of transactions that can be stored inside a block. Most of the block space is occupied by the sender’s digital signature. It takes 10 minutes to produce a block, so if a transaction cannot be added it would have to wait for the next block. This is rather inefficient by design as critics would point out. The block time along with the consensus required with decentralization are preventing the network from scaling to handle more transaction volumes. This is what makes the Bitcoin network slow.

Lack Of Privacy Features

All transactions on the blockchain are also immutable by design. This is for transparency, which is one of the purposes for using a blockchain. A transaction can have multiple signatures from different users. Once that transaction is validated and recorded on the blockchain, it is viewable to the public.

Anyone with a blockchain explorer can see who sent the transaction. It shows the details about a transaction with timestamp and the amount of Bitcoins that was sent. There is no confidentiality at all. This can be problematic to some people or groups because it can be tracked.

The SegWit Protocol

There are 2 actual solutions for the block size limitation. The first is called Segwit, and has been activated on the Bitcoin network since August 2017. This allows more transactions to be added to the block by implementing a sidechain that separates the signatures from the transactions. The actual size of the transaction field itself does not change, but moving the signatures toward the block header does increase block size but not by a large amount.

The other solution is to hard fork from the Bitcoin network and create a new design that supports larger block size. The latter was what led to Bitcoin Cash. Larger block sizes do increase transaction volume, but it can also require more computer processing and storage space. That can increase costs in exchange for faster transaction processing to scale the network.

Schnorr Signatures

The coming upgrade to address the block limitation is by implementing Schnorr signatures. This technique uses the Schnorr algorithm, which can combine multiple signatures into one. What this can do with the Bitcoin block is create just one signature for a user’s transaction. This will free up more space in the block to fit more transactions. The aim here is to increase transaction velocity. By design, the Bitcoin network can process from 3 to 7 transactions per second (TPS) (depending on how busy the network is). The busier the network, the more congestion and the lower the transaction that can be processed.

While this is a scaling issue solution, it can also help to reduce fees that users pay for transactions. This was something the Segwit implementation showed was possible. The costs were 25 to 40% lower compared to not implementing Segwit. Schnorr can offer the same result. The main difference between Schnorr signatures and Segwit is that Schnorr is implemented on-chain while Segwit is an off-chain solution.

Better Privacy For Users

Schnorr signatures also offer privacy benefits. Using the Coinjoin protocol, Schnorr provides a way to obscure sender and receiver addresses in a transaction. This makes it harder to track who sent a transaction and who the recipient was. The mechanism to this privacy implementation that will be included in the upgrade is called Taproot. This will be considered one of the biggest changes to Bitcoin since the hard fork in 2017.

Taproot is the privacy upgrade that will keep certain details about a transaction hidden from public view. This is by combining the public keys and their signatures into new ones. Schnorr signatures are a device used in this technique. They were proposed in BIP 340 and 341. The privacy feature will extend to other protocols on the Bitcoin blockchain like the Lightning Network. Combining the user details also reduces space, thus lowering transaction costs as an additional benefit.

The Coming Of Bitcoin Smart Contracts

Another exciting development with the upgrades is a new scripting language will be implemented called Tapscript (BIP 342). This is an upgrade to the Script programming language used in defining how Bitcoins are spent when sending from one user to another. It is the spending policy that is implemented on the blockchain. Tapscript builds on what is called batch verification in combining signatures into one. This makes processing transactions much faster with more efficiency.

Taproot will also introduce support for MAST (Merkelized Alternative Script Trees). This allows developers to select scripts that can support the least cost while preserving privacy. Before the Bitcoin can be spent it is locked to the script and summarized. This is a technique to help reduce the size of a transaction, thus helping to reduce space on the blockchain. This can be done with the use of Tapscript.

The idea of Bitcoin “smart contracts” is a capability Tapscript can add. Smart contracts are used on the Ethereum blockchain, and provide a way to program code used for tokens. Bitcoin did not originally have this type of system in its architecture. Bitcoin Script was more rudimentary and not considered programmable with complex logic.

Tapscript can improve upon Script, but it does not make the behavior of Bitcoin function exactly like Ethereum smart contracts. What Tapscript can do is automate multiple signature transactions with Schnorr signatures and MAST as part of the Taproot upgrade. It just paves the way for more advanced scripting for the privacy layer.

Conclusion

The upgrades to Bitcoin introduce concepts that may be long overdue. While many consider the transparency of the blockchain a feature, it can also be a detriment for users who want more confidentiality. Scaling has been an issue right from the point where Bitcoin popularity started growing. Not addressing these concerns would give others the wrong impression that Bitcoin is a slow network that doesn’t support privacy.

What these upgrades can deliver have huge benefits. Faster transaction times with lower costs and more privacy for Bitcoin users. These are new features that could attract new users who would benefit from them. It doesn’t remove the transparency and immutability of transactions, but provides enhancements that users can choose for their own consideration. It is not going to change what the Bitcoin blockchain is, but what users can do on the blockchain. The next step will be up to the Bitcoin community to signal its acceptance.

Disclaimer: This is not financial advice. The information provided is for educational and reference purposes only. Do your own research always to verify facts.