Updates to Bitcoin’s protocol are rare and are generally reserved for minor technical enhancements to the network’s coding. Unlike most other chains, Bitcoin has remained relatively consistent since its inception. Changes are often unhurried and methodically calculated to ensure the stability and security of the network. Most alterations are minor and designed to slightly enhance Bitcoin’s efficiency, rather than its functionality.
However, the Taproot upgrade was a remarkably important event for users across the entire Bitcoin network.
In this article, we will aim to provide Bitcoin users with a comprehensive, non-technical overview that explains the key impacts Taproot will have on the network and its users.
What is the Taproot Upgrade?
The Taproot upgrade is a collection of protocol improvements for the Bitcoin blockchain. The update introduces several new features that alter the way transactions are processed on the blockchain. Like other Bitcoin upgrade proposals, Taproot was voted on by Bitcoin miners who successfully reached consensus for implementation. Taproot went live in late 2021 and was the most important update to Bitcoin since 2017 when SegWit (Segregated Witness) was adopted.
Key Takeaways from Taproot
- The Bitcoin community activated the Taproot upgrade at block 709,632, on the 12th of November, 2021.
- Taproot is what is known as a “soft fork”, which is a type of software update whereby new implementations are backwards compatible with older infrastructure.
- While Taproot makes Bitcoin faster, cheaper, it also increases the network’s privacy, scalability, and programmability.
- Taproot powers Taro - a proposed protocol for issuing assets on the Bitcoin blockchain.
How Does Taproot Change Bitcoin?
Taproot comprises three separate Bitcoin Improvement Proposals (BIPs): BIP 340, BIP 341, and BIP 342. All three proposals went live simultaneously. Collectively, these BIPs aim to make enhancements to Bitcoin transaction processes with regards to speed, cost, flexibility, and privacy.
Let’s examine what each BIP within Taproot accomplishes.
BIP 340 - Schnorr Signatures
The most significant improvement to Bitcoin is the implementation of Schnorr signatures. These complex Bitcoin transactions have many benefits over the preceding mechanism, ECDSA, used for key generation and verification.
Most notably, key aggregation introduces the ability to combine multiple public keys and signatures into one. This aspect of the Taproot upgrade makes Bitcoin digital signatures faster, more secure, and easier to process. Schnorr signatures are backwards compatible with Bitcoin’s cryptography algorithm, allowing for Taproot to be a soft fork upgrade.
BIP 341 - Taproot
BIP 342 makes modifications to Bitcoin’s scripting language which allow it to read Schnorr signatures. This proposal also incorporates two key features for unlocking Schnorr’s full potential: MAST and P2TR.
MAST (Merkelized Alternative Script Trees) hides any preset conditions tied to transactions. Unused outcomes are not published on-chain, which provides additional privacy and condenses the size of transactions. With less data usage, this portion of the update can significantly help Bitcoin scale.
P2TR (Pay-to-Taproot) adds a new method of spending Bitcoin with Taproot addresses. Using a new script type, P2TR combines the functionality of two previous scripts P2PK and P2SH.This introduces another element of privacy, and provides better mechanisms to authorize transactions.
P2TR also makes all Taproot outputs appear similar. Thanks to key aggregation, the status of the applied public key (as a singular or multisig setup) is never revealed. This is an important enhancement to transaction privacy on the Bitcoin mainchain.
BIP 342 - Tapscript
Tapscript, the final Taproot BIP, updates Bitcoin's original scripting language. This allows Schnorr Signatures, P2TR, and other necessary coding necessary for Taproot to successfully operate on day one. In the long run, Tapscript will make it easier to implement more script updates for Bitcoin down the road.
Now, let’s take a look at the long term effects that the Taproot upgrade will have on the Bitcoin network.
What Impacts Does Taproot Have on Bitcoin Transactions?
Taproot’s three proposals enable improvements across the entire Bitcoin network. Most notably, Taproot gives Bitcoin:
Greater efficiency. Transactions will require less data and less work. As with Schnorr, multiple signatures can be combined for verification, rather than being aggregated individually. This upgrade will also impact the scalability and privacy of the Lighting Network.
More smart contract functionality. Taproot will encourage the use of smart contracts on Bitcoin by dramatically enhancing their efficiency. Having viable, native smart contracts will exponentially increase the types of transactions possible on Bitcoin (most importantly Bitcoin DeFi transactions).
Lower fees. Enhanced performance for transactions on the base layer and Lightning Network will subsequently reduce transaction costs.
Enhanced privacy. With Schnorr signatures, multi signature transactions are no longer discernible from single signature contracts. Additionally, less data for contracts is submitted publicly on the blockchain, and provides Taproot users with much desired privacy.
While it is critical to preserve the Bitcoin protocol, it is also essential for Bitcoin to continually upgrade itself. This ensures that Bitcoin can adjust to technological advancements, and stay competitive within the blockchain landscape.
Taproot marks a fundamental shift in Bitcoin utility and programmability. The improvements to the Lightning network and advanced smart contract capabilities will greatly improve Bitcoin’s utility. At the same time, lower transaction fees and increased transaction speeds will boost the network’s scalability. Overall, the Bitcoin Taproot upgrade will enable the network to properly shift towards more complex transactions and applications in an efficient manner.
The overwhelming support for Taproot from the entire Bitcoin community was also an important sign. In the past, some major Bitcoin Improvement Proposals were highly contested and debated. With Taproot, the update was able to seamlessly reach unanimous approval. Again, this highlights the alignment of the Bitcoin community on bettering the network while simultaneously preserving the Bitcoin core’s resilience as the leading blockchain.