Bitcoin development continues to thrive. Here are some of the exciting Bitcoin projects in development right now.
1. Schnorr Signatures
Schnorr signatures have the potential to solve some of Bitcoin’s biggest problems—scalability being the biggest sticking point right now, but other issues such as spam attacks and privacy can also benefit.
Created by Claus-Peter Schnorr, Schnorr signatures are a potential replacement for the Elliptic Curve Digital Signature Algorithm (ECDSA). ECDSA forms part of the cryptography technology powering Bitcoin. It consists of public and private key pairs, and each transaction gets signed with a signature. This ensures that only the account holder can authorize transactions. Signatures are easy to verify but are only made with the private key. Only the wallet owner knows the private key, so any signature generated is trustworthy.
While ECDSA works very well and has been running for the last ten years since Bitcoin started, it’s not the most efficient algorithm around. If you have a multi-signature wallet that requires two or more signatures to authorize any transaction, ECDSA has to sign, transfer, verify, and then store multiple signatures.
Schnorr signatures replace signatures for every part of a transaction, with a signature for the transaction as a whole. By only storing one signature for a whole transaction, Bitcoin’s blockchain could see a 25% reduction in the size of transactions.
Schnoor signatures are backward compatible with ECDSA, which is a fantastic feature. This means any changes to Bitcoin’s code happen with a soft fork, avoiding nasty situations such as the Bitcoin Hash War.
With Bitcoin gaining in popularity, anything to reduce the size of its blockchain is a good idea. Without changes like this, Bitcoin’s blockchain could be massive in the future, potentially thousands of gigabytes.
You can learn more about Schnoor signatures in the Schnoor Bitcoin Improvement Proposal.
Before looking at Taproot, we must first discuss Merkelized Abstract Syntax Tree (MAST). MAST is a proposal to improve Bitcoin’s smart contracts. Bitcoin uses pay to script hash (P2SH) in some circumstances. This lets you send coins to a specific wallet, which may often have spending restrictions. These could be that two or more signatories must sign off transactions, they must use a special password or any number of specific conditions.
This presents a problem. To spend funds secured with P2SH, the wallet owners must prove they have met the user-defined rules to access the funds. Part of this proof involves sharing the entire script and possible conditions to spend the funds. This isn’t great from a privacy standpoint, and if there are too many conditions, all that extra data has to get stored and processed.
MAST uses Merkle trees, found in Lightweight Nodes to verify a particular condition. This means that Bitcoin’s blockchain can ensure funds get spent in accordance with any specific rules defined by P2SH, without revealing what all those rules are.
P2SH and MAST can help to keep owners honest. If I make an agreement with Dan and Gavin that we’ll only send Bitcoin to addresses that contain the letter “B”, then P2SH can enforce these conditions. If Dan or Gavin have to sign off my transactions, I may want some backup conditions in case my colleagues are unavailable or uncooperative.
Taproot suggests that all P2SH rules should have an agreement clause. If all parties agree to a transaction, it gets signed and appears as a normal transaction to the rest of the world. Only if the parties can’t agree and the P2SH conditions enacted, are the P2SH conditions revealed to the outside world.
Of course, there’s a bit more math and cryptography involved, but Taproot is another project with the potential to reduce the baggage involved with complex Bitcoin transactions, and increase privacy. Taproot requires Schnoor signatures, however, so it isn’t ready to use right now.
Moving away from the technical developments, Bakkt is a new Bitcoin exchange. Intercontinental Exchange (ICE) are building Bakkt, and they own 23 other exchanges—including the New York Stock Exchange. It’s not surprising there’s so much excitement around it.
Bakkt is aiming to get institutional investors excited about Bitcoin. You’ll be able to trade Bitcoin in one-day futures contracts and in theory, investors will be able to trade your pension or mutual funds for Bitcoin.
ICE provides all kinds of reasons about their security, about how they are using a new architecture created for them, and how they store Bitcoin in an ultra-secure warehouse, but ultimately, they do not offer anything new in terms of technology. Their accounts get settled off-chain, for speed and ease of fund management. Your transaction will only appear on Bitcoin’s blockchain when withdrawing or depositing funds. Everything else remains inside Bakkt’s internal network.
While generally speaking, letting someone else store your private keys is a bad idea, the nature of this exchange means this may be acceptable. If you want to trade Bitcoin in a traditional stock market fashion, or you’d like traditional investors to get excited about Bitcoin, Bakkt could be the turning point. Once you’re done trading, go ahead and withdraw your funds and securely store them yourself.
There’s one problem with Bakkt: regulation. As Bakkt aims to trade Bitcoin futures contracts, the Commodity Futures Trading Commission (CFTC) regulator in the United States has to grant permission first. They are still in the process of deciding, so this exchange may die before it even begins trading.
Traditional investment firm Fidelity International are very close to opening a Bitcoin Custody platform. They may expand this to cover other cryptocurrencies in the future, but Bitcoin is the main focus right now.
While this may not be useful to you right now, a Bitcoin custody service has huge potential for the whole industry. Many Bitcoin projects have come tumbling down because they wanted to operate as a traditional bank but failed to arrange suitable security. The United States government refused several high-profile projects that “worked like a bank for Bitcoin”.
Of course, if you have Bitcoin, you don’t need a bank, but if you want wider international adoption of Bitcoin, you’ll need to tolerate institutional investment and “bank-like” services, at least in the short term. Fidelity may provide a valuable custody service to projects such as Bakkt.
What Are You Excited About?
These four developments represent a tiny part of all the fascinating Bitcoin projects, improvements, and businesses currently working to improve Bitcoin.
Between Schnorr Signatures and Taproot expanding Bitcoin’s capabilities, and projects such as Fidelity and Bakkt raising awareness and tempting institutional investors, there’s no shortage of excitement happening with Bitcoin. What developments are you most excited by? Let us know in the comments below.