A long-standing issue behind Bitcoin is that everything that happens on the blockchain is visible to everyone. While some want secrecy for nefarious purposes, the simple fact is that many just don’t want everyone else knowing what they’re doing – because it’s not their business. As a result, many coins have attempted to fix this issue in various ways, but with Bitcoin still being the king cryptocurrency, it makes sense that it’s still been the main focus. With the creation of Taproot (not yet implemented, but almost ready), a new layer of privacy is added to the blockchain.
Privacy for Smart Contracts
Smart contracts have become a fairly large part of cryptocurrency because they allow you to decentralize agreements. Rather than having to force two parties to actually do what they said they would, the contract itself handles all of that for them. They can be programmed to do pretty much anything you can think of as well, giving limitless possibilities. But a downside is that these contracts are all public as well. What this means is that you can tell who is taking part in them and what the end results were.
Taproot aims to solve this by merging signatures in such a way that the transactions themselves look “normal.” A great example that was given is a coin that can be redeemed by either both party A and B or by a time lock and B (meaning if it hasn’t been claimed by x time, B can claim it on their own). Under normal circumstances, all of this would be easily viewable on the blockchain through the smart contracts. However, with Taproot, the signatures are set up in such a way that the transaction looks like any other – it’s just one address sending funds to another, without showing all of the signatures that were involved and the addresses that signed off on them. Essentially, this makes it indistinguishable from any other send from one person to another.
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No Anonymity for Received Funds
While it does increase anonymity for who is sending funds when they’re in a smart contract or multi-sig setup, it’s important to note that it does not do anything for those who are receiving. Everything is still logged in the same way on the blockchain, so it’s all still visible to everyone. On top of this, one person still has to make the “final” signature, so it’s still possible for some backtracking to see where the funds are actually being signed from. To this end, it does help with anonymity, but only to a certain degree. But it has been declared as an easy and doable solution to throw on the Bitcoin codebase once Schnorr signatures are available, leading to one step closer to anonymous transactions. As for now, it can be considered as a stepping stone to where the vast majority of the Bitcoin user base wants the coin to be: in a state where it can be used freely.
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