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Bitcoin is becoming more anonymous and faster – the “Taproot” update has been activated

More privacy, less storage requirements and falling costs: the scene around the digital currency Bitcoin has big plans for the first major upgrade since 2017. The major change called “Taproot” was proposed back in January 2018. Even then, the goal was more anonymity and efficiency. Now the new protocol is actually being introduced at the end of a complicated voting process.

An important part of Taproot is the introduction of the so-called Schnorr signatures. These were developed by the Frankfurt mathematics professor and encryption expert Claus Peter Schnorr (78) and are intended to provide more privacy with Bitcoin.

So far, the Bitcoin network has been set up in such a way that virtually all transactions in the blockchain’s ledger can be viewed publicly, explains Philipp Sandner, Bitcoin expert and professor at the Frankfurt School of Finance & Management. “With these Schnorr transactions, a bundle of transactions with a single signature is released. As a result, it is sometimes not always possible to see who authorized an individual transaction or a bundle of it.”

That brings efficiency advantages, but also ensures that a transaction may be running where you don’t always know immediately who is behind it. “That is a disadvantage in terms of transparency. On the other hand, it also enables higher transaction throughput, new types of transaction approaches and also less storage space.”

Taproot was activated early Sunday morning. With this process, the Bitcoin scene also coped with a trauma from 2017. At that time, it was about installing the upgrade “Segregated Witness” (SegWit). But instead of agreeing on the new protocol, the scene got bogged down in a “blocksize war”. On the surface, the dispute was about the amount of data that is allowed in each Bitcoin block. There was also discussion about who controls the rules of the Bitcoin protocol. In the end, Bitcoin Cash split off from Bitcoin.

“The scene learned from it because the spin-off from Bitcoin Cash didn’t bring anything at the end of the day,” says expert Sandner. “There is Bitcoin. And Bitcoin Cash has slipped a few positions month after month. Actually, nobody is interested in Bitcoin Cash anymore.”

Taproot is “proof of the functioning governance of the system,” says the Frankfurt economics professor. “We have a few funky people who have new innovative ideas. Then we have this review process, which takes a long time until the high quality is guaranteed. And then the update is rolled out.” At this point, the operators of the many mining systems and the administrators of the network nodes in the Bitcoin network would also have to agree. “Governance is good when the separation of powers in the sense of” checks and balances “works.” So “nobody can just march through”.

There are contradicting assessments on the question of whether a successful taproot update will have an impact on the Bitcoin rate. The course of the digital currency had reached an all-time high on Monday at over $ 67,000 (about 58,000 euros). “The upgrade will have minimal impact on the Bitcoin price,” said Edward Moya, senior market analyst at online currency broker Oanda, Coindesk portal.

Sandner, on the other hand, believes that Taproot hardly played a role in the preparation phase. “If the whole update works well and there are no problems, then a lot of people will certainly be relieved. The price could potentially rise. But if something goes wrong and the network splits, then the uncertainty is great again. And then it turns out to be negative on the course. “

Sandner currently sees the uncertainties surrounding the cypto currency tether as the greatest risk for Bitcoin. The tether is the largest and most popular “stablecoin” in the world and is said to be firmly linked to the dollar. But now there is the suspicion that very soon you will no longer be able to exchange a dollar for a tether because the provider has not set aside enough reserves for it.

The biggest risk for Bitcoin so far has been the developments in China, says the expert. In this regard, the greatest accident that can be assumed has already occurred. China first banned Bitcoin mining and then banned Bitcoin. “But that didn’t really hurt the price.” But if the tether implodes now, uncertainty will set in again, Sandner is sure. “That would also push the value of Bitcoin significantly into the red.” That could also drag some crypto exchanges into the abyss. “In the long term, Bitcoin will simply continue to run. In the short term, that can be a significant risk.”

Despite the soaring Bitcoin, consumer advocates warn people against investing their money in crypto currencies, also because they are subject to high exchange rate fluctuations. A total loss cannot be ruled out.

(bme)

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