What is the Bitcoin Taproot upgrade?

Taproot is a soft fork that optimizes Bitcoin scripts, enhancing privacy, efficiency, and the network's ability to handle smart contracts. It is widely recognized as a major Bitcoin upgrade since the SegWit upgrade in 2017.

The Taproot upgrade consists of three different Bitcoin Improvement Proposals (BIPs), including Taproot, Tapscript, and its core—a new digital signature scheme called "Schnorr signatures." Taproot aims to bring numerous benefits to Bitcoin users, such as improved transaction privacy and reduced transaction fees. It will also enable Bitcoin to execute more complex transactions, broadening its use cases and allowing it to compete with Ethereum, particularly in smart contract functionality and support for decentralized finance (DeFi) and non-fungible tokens (NFTs).

The Taproot proposal was initially introduced by Bitcoin Core developer Greg Maxwell in January 2018. In October 2020, Pieter Wuille created a pull request to merge Taproot into the Bitcoin Core codebase. For the upgrade to be fully deployed, node operators must adopt Taproot's new consensus rules. The proposal ultimately received support from 90% of miners and was officially activated on November 14, 2021, in block 709,632.

How does Taproot work?

The Taproot upgrade is achieved through the collaboration of three Bitcoin Improvement Proposals (BIPs). Each proposal complements the others in different ways.

Schnorr Signatures (BIP340)

Schnorr signatures improve the speed and security of transaction verification on the Bitcoin network. These signatures are based on a cryptographic signature scheme developed by German mathematician and cryptographer Claus Schnorr. For many years, Schnorr's algorithm was protected by a patent, but the patent expired in 2008. Schnorr signatures offer numerous advantages, particularly in generating short signatures, known for their simplicity and efficiency.

The signature scheme adopted by Bitcoin's creator, Satoshi Nakamoto, is called the "Elliptic Curve Digital Signature Algorithm (ECDSA)." ECDSA was chosen over Schnorr signatures because it was widely used, easy to understand, secure, stable, lightweight, and open-source.

However, the advancement of the Schnorr Digital Signature Scheme (SDSS) may mark the beginning of Bitcoin and other blockchain networks adopting next-generation signature technology.

A key advantage of Schnorr signatures is their ability to extract multiple sets of keys in complex Bitcoin transactions and generate a unique signature. As a result, the signatures of all parties in a transaction can be combined into a single Schnorr signature, a process known as "signature aggregation."

In practice, Taproot makes it virtually impossible to detect whether a Bitcoin script is running. For example, with Taproot, different Bitcoin payment methods—whether Lightning Network channel transactions, peer-to-peer transactions, or transactions through complex smart contracts—appear indistinguishable. Observers of these transactions see only peer-to-peer transactions. However, it's important to note that this does not change the fact that the sender's and final recipient's wallet information remains exposed.

Taproot (BIP341)

Taproot is named after the Taproot upgrade and is built on the foundation of the 2017 SegWit upgrade. It uses Merkelized Abstract Syntax Trees (MAST) to expand the amount of transaction data in the Bitcoin blockchain.

Transactions on the Bitcoin network are secured by public and private keys. To spend digital assets in a wallet, users must first provide a signature to prove they are the legitimate owner before transferring tokens. Beyond single-signature transactions, Bitcoin transactions can also increase in complexity through features like time locks and multi-signature (multisig) requirements.

However, complex multi-signature transactions require multiple inputs and signature verifications, adding significant data volume to the blockchain and slowing down transactions. Additionally, transaction information is automatically displayed on the blockchain, exposing sensitive data about address owners.

With MAST integration, a single MAST transaction can represent multiple scripts, reducing the number of scripts and verifications needed. When complex Bitcoin transactions are sent to MAST, a Merkle tree is not required to process the transaction. MAST only allows the submission of the transaction's execution conditions to the blockchain, rather than all the details. This significantly reduces the amount of data the network needs to store. This not only improves the scalability and efficiency of the Bitcoin blockchain but also provides Bitcoin users with greater privacy.

Tapscript (BIP342)

Tapscript is an upgraded programming language for Bitcoin scripts, facilitating the other two Bitcoin Improvement Proposals (BIPs). It is a collection of opcodes—instructions specifying how transactions should be executed. With more available block space, new features become more flexible, enabling the Bitcoin network to support and create smart contracts in the future.

How does Taproot benefit Bitcoin?

As discussed earlier, Taproot significantly enhances Bitcoin's privacy and broadens its use cases. Other potential benefits include:

1. Improving network scalability by reducing the amount of data transmitted and stored on the blockchain;

2. Processing more transactions per block (increasing the transactions per second (TPS) rate);

3. Reducing transaction fees.

Another advantage of Taproot is the removal of signature malleability, a known security risk in the Bitcoin network. In short, from a technical perspective, signature malleability refers to the ability to modify a signature before a transaction is confirmed. Attackers can exploit this to create the illusion that a transaction never occurred. This exposes Bitcoin to the infamous double-spending problem, undermining the integrity of the distributed ledger.

Why is the Taproot upgrade important?

Activating Taproot enhances the functionality of the Bitcoin network, enabling faster and more reliable transactions. Before Taproot, Bitcoin's protocol development remained at the Layer 1 stage, while other protocols like Ethereum had taken the lead in Layer 2 and DApps. After the upgrade, Bitcoin began deploying smart contracts and expanding its use cases, catching up with future trends in the NFT and DeFi markets.

As the Bitcoin network becomes more efficient and fees decrease, its transaction volume and application scope will expand. Additionally, Bitcoin ensures user transaction privacy, making it a more competitive privacy coin in the market.

Conclusion

Taproot is a highly anticipated and widely supported Bitcoin upgrade. Implemented alongside Schnorr signatures, it brings significant improvements to privacy, scalability, security, and other features. These upgrades will enhance the appeal of the Lightning Network and promote multi-signature as a widely adopted industry standard.

Regardless of your level of involvement in the Bitcoin community, optimizing elements like privacy, efficiency, and security will create added value for users and improve the Bitcoin experience.