How the Bitcoin Ecosystem Works

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Much like the way courts and legislators provide a system of checks and balances in governments, bitcoin miners, node operators, and developers work together as a type of checks and balances in the bitcoin ecosystem. The most important stakeholders in the decentralized bitcoin ecosystem include node operators, who distribute blockchain data, bitcoin miners, who confirm bitcoin transactions in exchange for a block subsidy plus transaction fees, bitcoin tool and product developers, and of course, bitcoin users. On June 12, 2021, the Taproot upgrade reached a 90% consensus among miners, give or take, thus locking in the November Taproot activation. Schnorr Signatures build on this foundation because they’re able to take signatures from multiple parties involved in the same transaction and produce a single unique signature, thus making complex multisig transactions indistinguishable from regular ones. You should consult your legal and tax advisors before making any financial decisions. From an investment perspective, the impact that updates like Taproot have on bitcoin’s price volatility remains unclear. For comparison, immediately after the Taproot upgrade went live, bitcoin was trading flat in the low-$60,000 and then peaked around $69,000 in November 2021. Market analysts are now closely watching bitcoin software developments, so these projections are now priced in when traders consider the evolution of bitcoin’s price.

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Notably, in the four years since SegWit’s launch, almost half of the adoption, now at 80%, happened just this year. It’s thought that bitcoin’s creator Satoshi Nakamoto chose it largely for convenience due to its wide acceptance and successful history, but also because the use of Schnorr Signatures was restricted by a patent until a few years ago. BIP 341, Taproot: Allows for the usage of Schnorr Signatures and integrates the Merkelized Alternative Script Trees (MAST) method-essentially a way to hide some private transaction information and commit less smart contract transaction data to the blockchain. The alternative to a soft fork is a hard fork, which results in participants being cut off from the network if they don’t upgrade. So soft fork updates are already a part of network participants’ existing workflow. Taproot’s predecessor, SegWit, inspired a contentious debate about whether a soft fork was the best approach. To underscore Taproot’s significance, it is worth noting that bitcoin is much more conservative than other blockchains when it comes to upgrades. Though the full scope of Taproot’s enhancements will be proven over time, they are expected to boost efficiency and privacy of bitcoin transactions and reduce the amount of data to be transferred and stored on the blockchain per transaction.

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In August 2017, an upgrade called Segregated Witness increased Bitcoin’s transaction throughput capacity within a given block by giving a discount to certain data used in transactions. Bitcoin miners run hardware devices that finalize transactions by guessing random numbers, and whichever miner guesses the correct number gets to create the next block. In short, the SegWit upgrade allowed bitcoin miners to process more transactions with each block. Regardless of whether a software update directly impacts bitcoin’s price, the open source development process remains a key factor in determining bitcoin’s long-term value as a global currency. A wide variety of bitcoin companies, from exchange companies like BitMex to wallet producers like Jack Dorsey’s charitable Square spinoff, Spiral, sponsor grants for independent, open source developers to maintain Bitcoin Core code and other like-minded software projects. As of March 2023 there are currently five volunteer Bitcoin Core maintainers on Github, in addition to hundreds of contributors, although more may be added to uphold the network’s diversity. Currently, smart contracts can be created both on bitcoin’s core layer and on the Lightning Network, an additional bitcoin layer designed for near-instant transactions.

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Smart contracts executed on the Lightning Network lead to faster and cheaper transactions. BIP 342, Tapscript: Grants developers more freedom to create bitcoin smart contracts. Node and mining hardware operators generally check for software updates every quarter anyways, or more often in rare cases when developers fix bugs. Bitcoin users who don’t operate their own hardware rely on service providers, and developers of wallets and other services will also update their codes. In contrast, Taproot received widespread support from developers, miners and users. When they agreed, they updated the free, publicly available software that most users rely on when they use bitcoin. There is a historic update called Taproot, which we’ll explore later in greater detail, where it was unknown whether the diverse companies involved with bitcoin mining would accept updated information and formalize it as part of the network. With regards to what this bitcoin update did, Taproot consists of three innovations to the bitcoin protocol, the proposal included a culmination of BIPs: Schnorr Signatures, Taproot, and Tapscript, all of which enabled increased functionality for bitcoin transactions.

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