Bitcoin Taproot BIP Could Be A Privacy Game-Changer

Colin Muller

BIP-Taproot, perhaps one of the most important Bitcoin Improvement Proposals (BIP) ever has been officially released for public scrutiny and deliberation. At risk of being overshadowed by Bitcoin’s (BTC) recent positive price action and the hot-off-the-press Binance hack drama, the news of BIP-Taproot is quite significant. 

This is because, if the upgrades to Bitcoin’s code are realized along the lines of BIP-Taproot, both privacy and efficiency of transactions of the Bitcoin network will be significantly improved and inaugurate an altogether new era for the leading crypto.

Why All The Fuss?

The general thrust of BIP-Taproot as that it is designed to replace the current, clumsy scripting system of Bitcoin, called “pay to script hash” (P2SH).

Believe it or not, Bitcoin actually has some capability as a smart contract platform, albeit a rudimentary one (with nowhere near the scripting capability of newer cryptos like Ethereum).

In Bitcoin, this scripting system can be used to describe specific conditions by which a transaction will be executed - like multi-signature (“multisig”) transactions. A Bitcoin transaction can even be programmed to accept several different types of trigger conditions, with only one of them needing to be hit for the transaction to execute.

This is all well and good, but the main problem with the current system is that such scripted or advanced Bitcoin transactions are publically legible: anyone can see that complex P2SH transactions are being employed rather than simpler ones, and such information can be used to glean identifying information.

Without getting too far into the technicals (of which there are many in this BIP), the upshot of the entire upgrade, should it be implemented as planned, is that all the different kinds of Bitcoin transactions possible will become opaque and look identical. What’s more, this new opacity extends even into grouped transactions which can be obfuscated by Schnorr signatures.

As CryptoGlobe discussed in a March article, Schnorr signatures are a huge improvement over Bitcoin’s current signature regime. One of the most exciting use cases for Schnorr signatures is the possibility of invisibly conducting multi-user CoinJoin transactions, whereby multiple users can batch transactions together so as to hide the transactions’ details. After BIP-Taproot, CoinJoined transactions could be made to look like any other transaction, greatly increasing the prospects for Bitcoin privacy.

Tall Order

Pieter Wuille, the author of the BIP and one of Bitcoin’s most central developers, warned that “combining all these ideas in a single proposal would be an extensive change, be hard to review, and likely miss new discoveries that otherwise could have been made along the way.”

But by way of justification, he adds that “separating them all into independent proposals would reduce the efficiency and privacy gains to be had, and complicate analysis of their interactions.”

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange ( CME ) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported , there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

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