What is a Bitcoin Improvement Proposal?

• Since Bitcoin is decentralized and autonomous, changes can only be proposed through a so called Bitcoin Improvement Proposal (BIP), where miners have to agree to, since they are affected economically the most by changes in the Blockchain

• Bitcoin has no permanent team of programmers and no roadmap and developers discuss on GitHub which proposals are good enough to be presented to miners

• Bitcoin Improvement Proposals can reach from small things like the design or a small bug, and up to major changes, like a hard fork

• Each Bitcoin Improvement Proposal is a fork, comparable to software version 1, 1.1, 1.2, and so on. A hard fork is very drastic, because it creates two separate blockchains and you can think of this as second version of the software

• A soft fork is backwards compatible with older versions of the Bitcoin software, a hard fork is not

• Segregated Witness is the most important bitcoin improvement proposal to date, as a split in the community occurred and Bitcoin Cash was born.

• Taproot was a comprehensive upgrade of the Bitcoin blockchain and revolved primarily around further scalability of the network, as well as stronger privacy and easier updates in the future

• Implementing a Bitcoin Improvement Proposal has mostly advantages, but also disadvantages

• Bitcoin Ordinals made NFT on Bitcoin possible, Bitcoin Runes made creating a new token on Bitcoin as easy as on other popular blockchains.

• Bitcoin Improvement Proposals seem like an awkward way to get things done, but Bitcoin is still by far the most popular coin. Without a roadmap, however, this could quickly go downhill. Whether this ever happens is written in the stars

Why are there Bitcoin Improvement Proposals?

Bitcoin is decentralized and autonomous. Computers tasked with running the Bitcoin software and keeping the network secure are known as miners or nodes. They vote on the proposals made to improve the network because they keep the network running and have the highest interests.

The Bitcoin network does not have a permanent team, like many other major blockchains as Ethereum or Solana. Programmers working to develop the Bitcoin Core are volunteers or they are sponsored. A few work paid full time to improve the Bitcoin blockchain.

With such an ever-changing composition, it becomes difficult to get things done and keep Bitcoin up to date. So there has to be a way to get both programmers and miners on the same page. And that is the Bitcoin Improvement Proposal.

How do Bitcoin Improvement Proposals work?

After BIP 0001 set the tone, improvements to the Bitcoin protocol were regularly proposed. Any component could be the issue here, such as the consensus mechanism, development procedures, gas fees, a bug fix, scalability, security, block size or community standards.

Votes can also be cast for sweeping issues, such as the hard fork. This is a last resort and will only be applied in very exceptional cases, such as the Bitcoin Cash hard fork, which will be discussed later.

Introduction of a BIP

If someone has an idea that is beneficial to the Bitcoin blockchain, a process can be started to make it a BIP by starting the discussion among developers on GitHub. If the developers agree that it is important enough to add to the Bitcoin blockchain protocol, work can be done on the technical side.

Once the BIP is complete, there can be a vote by the miners and nodes whether they think it is good enough to accept and implement. Each upgrade to the Bitcoin network started its "career" as a BIP.

What types of BIP are there?

There are several types of BIP:

1. Informational: reflects only guidelines or design issues.

2. Process: describes a change in processes.

3. Default: describes changes to the protocol, transaction validations or how a block looks.

4. Consensus: proposes changes to Bitcoin's consensus mechanism.

5. Deployment: how changes are implemented.

6. Extension layer: proposes extensions or enhancements to specific layers of the Bitcoin protocol.

7. Transaction type: suggests new transaction types or formats.

8. Layer2: layer2 or off-chain solutions for scaling the Bitcoin blockchain.

9. Economic: deals with the economic aspects of Bitcoin, e.g. transaction fees miners get.

10. Research: research ideas or experimental changes to the Bitcoin protocol.

The list of all BIPs can be found on GitHub: https://github.com/bitcoin/bips

What are forks on Bitcoin?

Going through a BIP is actually a fork. You can think of the soft fork as version 1 of software, then 1.1 and 1.2, and at version 2.0 there is a hard fork. Forks are perfectly normal with software because there are always new developments in the crypto world. A fork on Bitcoin has four variants.

Soft fork

When a soft fork is implemented, an update to the blockchain software is available for miners or nodes to download. These are not mandatory, and nodes running older versions of the software are backwards compatible with the new software. You can think of a soft fork as a minor tweak to a blockchain that doesn't cause much of a stir, such as a faster network or bugs being fixed.

As soon as it comes to miners' earnings, Bitcoin miners' ears are perked. Then there can be violent reactions, because the miners keep the network running and need enough income to keep mining.

Hard fork

With a hard fork, mandatory sweeping changes are made to the network's consensus protocol and there is no backwards compatibility with the old network. Therefore, if you do not download the new software, you can no longer participate in mining and validating new blocks. A hard fork creates two different blockchains, such as BTC and BCH.

The formation of Bitcoin Cash as a hard fork of Bitcoin was all about block size. Bitcoin supporters wanted to keep the block size small so that nodes would not have to run as much heavy hardware. With a very large blocksize, only companies or large organizations would have enough money to run these expensive nodes. This is known as the "Blocksize Wars," and of course it was all about money. The miners didn't want to be squeezed out of the market by SegWit and the Lightning Network and kept the blocksize at 8 MB, while Bitcoin Cash took a different path via a hard fork with larger blocksizes and therefore lower transaction costs and more scalable.

Accidental fork

If two miners at the same time find the solution of the cryptographic puzzle and are allowed to create a new block they will. As a result, suddenly two blockchains appear. Since the longest blockchain is always considered as the correct one, during a new block formation, the miner who then finds the next block, is able to add it to his respective version of the two blockchains. The other miner with the correct solution will be out of luck, but there will be a single blockchain again.

The fork of the Bitcoin software

Since Bitcoin is open source, you can technically create a new coin with it. That has happened before, such as by Litecoin. When you create a new coin with Bitcoin's software, we also call it a fork, say a spin-off like series or movies.

Key Bitcoin Improvement Proposals

Some BIPs are a lot better known than others because they have had more impact on the Bitcoin network. We will review the most important ones.

BIP 141 Segregated Witness

It was proposed by Peter Wuille in 2015 and implemented in 2017. Segregated witness means separating the digital signature from the transaction data. Originally, this did not require a hard fork.

As Bitcoin became more widely used, its lack of scalability began to become apparent. Transaction costs were skyrocketing and a transaction could take a long time to complete. Digital signatures occupied 65% of a block, so SegWit allowed more transactions to be done per time period and at a lower cost. The block size was also increased so that even more transactions could be processed per block. Privacy and security were also improved.

The increased block size resulted in higher mining difficulty and resulted in higher costs; which was opposed by many Chinese miners in particular. Miners furthermore earned less in transaction fees. The controversy surrounding this event lead to the Bitcoin Cash hard fork, which is up to now the best-known BIP.

Sidenote: If SegWit and larger blocksizes had not been introduced, transaction costs and waiting times would have probably got so high, that it would have shut down Bitcoin trading.

BIP 340 - 341 - 342 Taproot

The Taproot soft fork was proposed by Gregory Maxwell in 2018 and activated in 2021 after approval by miners.

BIP 340 Schnorr signatures

Bitcoin employed the Elliptic Curve Digital Signature Algorithm (ECDSA) to create digital cryptographic signatures before Schnorr signatures.

This involves adding a digital signature to each transaction to prove that the owner of a Bitcoin address has access to the private key, without this private key communicate. Each input to a transaction needed its own digital signature.

Schnorr signatures can drastically reduce the number of digital signatures by, among other things, MultiSigs and subsuming several digital signatures into a single one. This not only addressed privacy concerns, but also reduced the amount of data in a block, allowing more transactions to fit in a block.

Schnorr was a soft fork and is backwards compatible with ECDSA. However, as time goes on, there will be more and more miners and nodes downloading the Schnorr update.

BIP 341 Bitcoin Taproot upgrade

Builds on the SegWit upgrade in terms of privacy via Merkelized Alternative Script Trees (MAST, sometimes called Merkelized Abstract Syntax Tree), which only include the executed terms of a smart contract capture transaction on the blockchain instead of all the details. Before Taproot, you had to use the Bitcoin script all enter terms of a smart contract in a block, which takes up more space and reveals privacy-sensitive information.

A Merkle tree proves that data exists without revealing the entire data set. By working with a root tree, which consists of a single number, Merkle trees can aggregate a good number of data and replace it with a single number. If this number is true, the entire Merkle tree with all the data in it is also true, and a lot of space is saved in a block of a blockchain.

With Bitcoin Taproot upgrade, sensitive private information is shielded and Bitcoin becomes more scalable because a lot of information is aggregated before it appears in a block.

BIP 342 Tapscript

This is an update for the Bitcoin script. It uses Schnorr signatures for more efficiency in the script language. Tapscript also makes it easier to implement future updates for Bitcoin by integrating new types of opcodes (instructions for a transaction), such as Pay-to-Taproot outputs.

The overall Taproot update should start to provide more space on the Bitcoin blockchain and could promote all sorts of new features on Bitcoin, such as DeFi and other developments based on smart contracts.

BIP 9 Versionbits

This Bitcoin Improvement Proposal were supposed to make it easier to apply a soft fork. Miners could indicate whether they agreed with an update by a certain bit of the 32bits version field of Bitcoin to 0 or 1, agree or disagree.

If enough miners agreed (more than 95%), the update or the BIP could be activated and a new version of the Bitcoin protocol was born, which miners and nodes could download and start using.

Versionbits also made proposing a protocol upgrade easier and a lot more decentralized.

BIP 10 MultiSig Transaction Distribution

Controls distribution when a number of Bitcoins need to be distributed to multiple recipient addresses.

BIP 16 Pay to Script Hash

A new standard transaction type and simpler rules for passing a transaction by Gavin Andresen from 2013. This BIP also provided more privacy. This was the first update after Satoshi Nakamoto's departure.

BIP 347 OP_CAT in Tapscript Smart contracts

Smart contracts on the Bitcoin network. This BIP is still under discussion, but is important enough to mention.

Advantages and disadvantages of a BIP

Advantages:

1. A BIP could make the Bitcoin network more user-friendly.

2. A BIP can make Bitcoin more reliable and secure.

3. A BIP can make Bitcoin more scalable and efficient.

Disadvantages:

1. With all that voting and upgrades and updates, the Bitcoin network can become fragmented, as all those BIPs may or may not be implemented by a miner or node.

2. Any BIP is a risk to the network because it can have bugs in it and users are unaware of them.

3. Users of the Bitcoin network may be at financial risk in some cases if they do not understand how a BIP works.

Bitcoin Ordinals

A number of rapidly becoming popular features on Bitcoin should not go unmentioned, whether they are BIPs or not.

Bitcoin Ordinals brings the NFT (non fungible token) to the Bitcoin blockchain. Ordinals work with the Taproot protocol, which allows one to link data to a specific satoshi (the smallest part of a Bitcoin). It was created by Casey Rodarmor, who doesn't even work on the Bitcoin team.

An Ordinal can be translated by the position of a number in a series. For example, you could make an Ordinal from satoshi 100,000 of Bitcoin 100,000. This would mean that you create an NFT on the 100,000th satoshi of the 100,000th Bitcoin ever mined. You get 400 Kb of space for this, so you can put a painting, picture, sound clip or whatever in here and have made an NFT. Then, of course, you have to own that satoshi.

Since the launch of Ordinals, quite a few additional Bitcoin addresses have been created to use Ordinals. Ordinals occupy about 50% of a block in the Bitcoin blockchain, which of course not everyone is happy about. As a result, you get more network congestion and miners make more money, which in turn they don't mind so much.

Bitcoin Runes

Casey Rodarmor has been widely criticized for his Ordinals creation, for needlessly padding a Bitcoin block with "junk." This raises transaction costs and slows down the Bitcoin network.

So he put his best foot forward and set to work to solve the problems of his creation. This solution he called Bitcoin Runes. It is a new token standard on the Bitcoin blockchain that you can compare to other standards like ERC-20 and BEP-20.

The purpose of Bitcoin Runes is that you can easily and cheaply create new fungible tokens on Bitcoin, without filling a Bitcoin block with "junk UTXO," as with Ordinals. By this standard, making funcoins or meme coins as simple as on other major networks such as Ethereum and Solana.

Bitcoin Runes work almost identically to the ERC-20 token, you specify some variables like Symbol, ID, Amount, Decimals and within a short time you have your token together and can start trading the token. It can greatly increase the popularity of the Bitcoin network.

Bitcoin Runes doesn't have its own BIP yet, but given the technology, this probably won't take long, at least if the Bitcoin community can agree on what the function of the Bitcoin blockchain actually is, because many miners see Bitcoin as a store of value and don't want to know anything about a "usable blockchain." Bitcoin is pure digital gold to them and these miners will always vote against developments that turn Bitcoin into a network for smart contracts, memecoins or other side roads.

The Future of Bitcoin Improvement Proposals

Since Bitcoin has no permanent team and miners have the final say, new BIPs will be proposed all the time. Bitcoin cannot lag behind all kinds of developments, or the fairy tale may suddenly end.

Therefore, BIPs are likely to be proposed more and more frequently, as developments in blockchain and cryptocurrency going faster and faster. As long as the Bitcoin team has no real leaders, miners will have to consider each BIP every time.

One of the drawbacks of decentralized blockchain is its slow development and lack of central governance. This is certainly according to Satoshi Nakamoto's vision, but if a BIP is the result of pure chance or a developer's momentary stroke of genius, Bitcoin's development may lag significantly behind blockchains with a steady strong team.

Without a roadmap, Bitcoin looks like a ship without a rudder. Yet it still sails and is still the world's leading cryptocurrency. Whether they will remain so if Bitcoin Improvement Proposals are to pave the way remains to be seen.