Bitcoin’s Next Layer Two Protocol? – Bitcoin Magazine

This article is about a technological concept based on the proposed Taproot protocol upgrade. If you’re not yet familiar with the basics of how Taproot works, it’s recommended that you first read this explainer.

Taproot, a potential upgrade to the Bitcoin protocol first proposed by Bitcoin Core contributor Gregory Maxwell, is in its late stages of development. The technology consists of a clever combination of crypto-tricks that would let users hide complex smart contracts inside regular-looking transactions — the complexity is only ever revealed if parties to a contract are uncooperative.

Leveraging this idea, Bitcoin Core contributors including (but not limited to) Jeremy Rubin, Antoine Riard, Gleb Naumenko and Gregory Maxwell himself have been speculating about a general concept referred to as payment pools, joinpools or coinpools. These pools — we’ll stick to calling them payment pools for now — would let groups of users share ownership of the same coins (technically: UTXOs) as recorded on the Bitcoin blockchain, while letting any of these users make (or receive) payments with them. As the group and its individual members “hide” in a Taproot structure, all of them enjoy more privacy, smart contract flexibility and other benefits… and they potentially even enjoy these benefits off-chain, making payment pools a new Layer Two solution.

Although design specifics vary a bit from one Payment Pool proposal to the next, the general concept is the same. Here’s the basic idea…

Sharing A Coin

First, to create a payment pool, users combine their (fractions of) coins by aggregating them in a Taproot address shared between them. So, let’s say Alice owns three coins, Bob owns two coins and Carol owns one coin, for a total of six. Together, they create a transaction that sends these coins to the shared address, making it a payment pool with six coins.

On the blockchain, the payment pool address looks like a regular Bitcoin address, now holding six coins….

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