Bitcoin’s major update and the history of wallets.
Considered as a medium of exchange, Bitcoin is now primarily regarded as a store of value. Nowadays, bitcoin users are comfortable with a panoply of feature-rich software and hardware wallets, compared to the early days as there were no wallets. As users are now more accustomed to wallet interaction, Bitcoin has just received its largest upgrade since 2017. This upgrade will introduce what is called Schnorr signatures, which will help Bitcoin transactions become more private, efficient and cost efficient. But what are the different upgrades? Additionally, we will discuss all things wallet through a complete background introduction to better understand the evolution and the steps that got us to the current upgrades.
In 2009, a developer named Satoshi Nakamoto created the Genesis Block which was the first blockchain Block. It forms the foundation of the Bitcoin trading system and is the model for all other blocks in the Bitcoin blockchain. This allows the creation of a solid foundation that guarantees the harmonization of the entire chain of cryptocurrency blocks generated over time. In this sense, each genesis block contributes to ensure communication between two nodes. Since then, have there been any upgrades the following years?
Since 2012, Bitcoin and other cryptocurrencies have incorporated the P2SH format in many of their addresses. Through this transactions can be sent to a script hash, instead of a public key hash. That is, transactions are sent to an address starting with 3 instead of 1 (ECDSA). This results in addresses encoded in a format representing the encoded hash of a script, and not that of an ECDSA public key. Likewise, due to this feature, P2SH format addresses are generally used to carry out multi-signature addresses transactions. Although this is not its only use. With P2SH, users can configure addresses that can represent a script through which other types of transactions are encoded thanks to BIP16 (Bitcoin Improvement Proposal) integration.
On 21 July 2017, Bitcoin miners locked-in a software upgrade referred to as BIP91, meaning that the Segregated Witness upgrade got activated at block 477,120. A SegWit is a soft-fork, that is to say a minor modification of the protocol of a cryptocurrency, which maintains compatibility with the previous version. The SegWit soft-fork is one of the biggest developments in Bitcoin’s software since its creation. In terms of evolution, SegWit is not a new idea: the update was first proposed during the year 2015, before being eventually formalized in December 2015 by Pieter Wuille and other developers of Bitcoin Core.
However, SegWit was not implemented until much later due to its controversial nature and the minors’ rejection. It wasn’t until 2017, as part of the SegWit2X compromise, that the proposal to allow SegWit (BIP-91) was locked in. The activation of SegWit on the Bitcoin network finally took place on August 24, 2017, at block 481,824. The SegWit has thus made it possible to change the format of transactions in the Bitcoin blockchain in order to increase the capacity of a block, and raise the level of transaction security.
Currently, SegWit is a scaling solution used by several different cryptocurrency networks, including Litecoin. In summary, its main purpose is to correct the malleability of transactions, and also to increase the transactional capacity of Bitcoin in order to improve the verification of signatures and to facilitate future modifications of the protocol. Its BIP number is 141. But, what was SegWit2x used for?
The SegWit2x effort began in May 2017 with a simple goal: increase block size and improve Bitcoin’s scalability. At the time, the Bitcoin community was in crisis after nearly 3 years of fierce debate, and the consensus for Segwit seemed like a distant mirage, with only 30% support among miners. SegWit2x had its first success in August as the situation brightened and quickly enabled Segwit to be successfully activated. Unfortunately, On 8 November 2017, the developers of SegWit2x announced that the hard fork planned for around 16 November 2017 was canceled due to a lack of consensus. Has there been a new large Bitcoin upgrade since 2017?
For the past four years, Bitcoin’s sole major upgrade has been Taproot, and it is the biggest upgrade in Bitcoin’s network after the Segregated Witness (SegWit) upgrade in July 2017 addressing scalability issues. Taproot promises to improve many features for the network including privacy and smart contract functions. These changes will lead to improved wallet functionality and reduced fees for complex transactions. “Taproot is an upgrade that will improve Bitcoin’s capacity for scripting, bringing it in line with competing blockchains like Ethereum that already have programmable smart contracts” according to Crypto Briefing report, a crypto research company. Before Taproot’s implementation, verification of transactions on Bitcoin’s network was slow because each digital signature was validated against a public key. This method multiplied the amount of time required for complex multisig transactions that require multiple inputs and signatures.
Its upgrade combines single-sig and multisig transactions into a single verification process. The upgrade also has implications for privacy because it makes it difficult to distinguish between single-signature and multi-signature transactions. Therefore, it will become more difficult to distinguish the participants of a transaction on Bitcoin’s public blockchain. In addition, it streamlines transaction processing, making it easier and faster to confirm transactions on Bitcoin’s network. It also increases the number of transactions that can be processed, and decreases the overall cost of transactions on the network because the size of transactions increases.
Likewise, Taproot will also introduce MAST (Merkelized Abstract Syntax Tree), which will make it more difficult to trace and analyze Bitcoin transactions, the Crypto Brief report added. As a result of the upgrade, multi-signature transactions will now be indistinguishable from simple transactions, meaning greater anonymity and privacy for users. Finally, the implementation of Taproot is also a win for smart contracts on Bitcoin’s blockchain. It could open the door to more innovative financial applications on Bitcoin’s network. According to some, the Taproot upgrade also means that Bitcoin could become a player in Decentralized Finance (DeFi). Although the cryptocurrency’s blockchain has always possessed smart contract capability, it has never been utilized to its full potential due to the issues associated with the scaling of transactions. The Taproot implementation solves this issue. In brief, Taproot has many advantages for Bitcoin users and the platform such as cheaper transactions, better smart contracts and more privacy transactions. This brings us to wallet discussion.
A wallet address is a string of letters and numbers from which cryptocurrencies or NFTs can be sent to and from. A wallet address is also known as a Public Key and can be shared with different contacts like an email address. Each cryptocurrency has its own wallet. Let’s discuss who created the first wallet and the history behind its creation.
Satoshi began working on the first Bitcoin wallet. At the same time, he was working on the development of the Bitcoin protocol, and the Bitcoin-Qt wallet, as it was known, was released in February 2009. Then, the software bundle was renamed Bitcoin core, known as the best implementation or client. The private keys for the Qt wallet were stored on a file on the user’s desktop titled wallet.dat, prompting anguished stories over the years of individuals accidentally deleting this folder or having it accessed by malware searching for it specifically, resulting in the loss of tens of thousands of BTC. Though there was nothing inherently insecure about Satoshi’s wallet. In fact, given that it came with the option to create a fully encrypted backup, Qt was a highly secure wallet when optimally configured. This brings us to discussing subcategories of wallets.
There are two subcategories of wallets: hot and cold. A hot wallet has a connection to the internet or to a device that has a connection, while a cold wallet has no connection. Lastly, there are three forms of wallets: software, hardware, and paper. Each of these can be considered either a hot or cold wallet. Thus, you can have a noncustodial software hot wallet, a noncustodial hardware cold or hot wallet, or a custodial hardware cold wallet. These are the most common types, but you may also encounter other combinations. And there are a couple wallet address format iterations, changing the format of the wallet.
As there are a myriad of versions of the Internet Protocol, there are three Bitcoin core formats: P2PKH, P2SH and BECH 32. The first one, P2PKH, has been used for transactions on the Bitcoin protocol since January 16, 2009, just one week after the first block in the Bitcoin blockchain (Genesis Block) was mined. This one is incompatible with Segwit improvements and has 26 to 36 characters, for example 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa. It is the oldest Bitcoin address format. The abbreviation P2PKH stands for “Pay-to-Pubkey Hash.”
The second one, P2SH addresses, are a newer form of wallet type that essentially removes some signature data from transactions, lowering the size of the transaction data needed to store in one block, for example 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy, therefore freeing up more space for additional transactions to be added to the same block. This means the network can process more transactions per block and the sender pays lower transaction fees.
The third one is BECH 32, or P2WPKH, which differs from Nested SegWit wallets in many exchanges. Bech32 is the native segwit address format, and is supported by the majority of software and hardware wallets, but a minority of exchanges. It is an advanced address type used to reduce the block size of the blockchain in order to speed up transaction response time. Addresses are longer than P2PKH and P2SH, for example bc1qnkyhslv83yyp0q0suxw0uj3lg9drgqq9c0auzc.
In conclusion, the most remarquable upgrade in Bitcoin is the Taproot. It is also positive for privacy as it makes it difficult to identify participants in a transaction on Bitcoin’s public blockchain by disguising multi-signature transactions from single-signature transactions. There are several different types of wallets, each with their own features and levels of security. Many cryptocurrency wallets can be used to store keys for different cryptocurrencies. The different upgrades in Bitcoin since its creation are fascinating, keeping us eager to find out what the next upgrade will contribute to a revolutionary invention.
Sources
https://blog.trezor.io/segwit-and-its-legacy-taproot-uasfs-and-lightning-82ce40e94fe2
https://news.bitcoin.com/digital-ruble-much-needed-russias-central-bank-says-wont-delay-testing/
https://www.investopedia.com/bitcoin-taproot-upgrade-5210039
https://cointelegraph.com/bitcoin-for-beginners/a-beginners-guide-to-the-bitcoin-taproot-upgrade
https://www.kraken.com/fr-fr/learn/what-is-taproot
https://fixedfloat.com/fr/blog/guides/bitcoin-address-formats
https://support.coinmama.com/hc/en-us/articles/360012830340-Wallet-address-formats-
https://academy.bit2me.com/en/what-is-p2sh/
https://cryptocurrencyfacts.com/bitcoin-address-formats/
https://www.interactivecrypto.com/3-bitcoin-address-formats-you-need-to-know
