Why Taproot?
Bitcoin Taproot is the most significant upgrade to the Bitcoin network since SegWit in 2017. The main aim of the Taproot upgrade is to enhance privacy and efficiency, thereby enabling lower transaction fees. All of these aspects have been areas of criticism for the “King of Crypto”.
Bitcoin carries the vision to become a global efficient payment network without intermediaries. Indeed, Bitcoin is a much more private, efficient and fast alternative than conventional financial intermediaries. However, Bitcoin’s competition now comes from the wider crypto community. For example, alternative cryptocurrencies involve technical improvements in comparison to the Bitcoin protocol, enhancing more privacy (e.g. Monero, Grin Coin) and efficiency (e.g. Bitcoin Cash) to their network.
You can read our previous blog post for more insights on how Bitcoin transactions work so far.
The Upgrade
Greg Maxwell, a Bitcoin Core developer, was the first to propose the Taproot upgrade back in 2018.
Upgrades to the Bitcoin protocol originate from Bitcoin Improvement Proposals (BIPs). The Taproot upgrade is based on three BIPs. Specifically BIP340, BIP341 and BIP342. These BIPs translate Maxwell’s idea into code. The upgrade received a mandate of more than 90% from miners in June 2021, which signalled its acceptance by the community.
BIP340
Bitcoin’s digital signatures derive from the ECDSA encryption algorithm which facilitates the public-private key relationship between recipients and senders. BIP340 introduces an alternative cryptographic scheme – the Schnorr Signatures. Schnorr Signatures enable a more efficient as well as secure and scalable method of validating bitcoin transactions.
The key innovation of Schnorr Signatures is the implementation of key aggregation. Key aggregation enables smart contract execution and multi-sig transactions, only by using the same amount of data as a simple bitcoin transaction. An aggregated public key and an aggregated signature of participants is the only data needed to validate transactions, instead of requiring the public keys and signatures of all participants. This feature saves space and time but also enhances privacy because validating nodes do not access the participants’ public keys.
BIP341
Privacy of transactions is often an issue of criticism against the Bitcoin network. BIP341 enables Merklized Alternative Script Trees (MAST) in an attempt to expand privacy and smart contracts utility. With MAST, only a part of the executed smart contract transaction is displayed on the blockchain. Typically, the blockchain records all data from possible smart contract conditions. Therefore, MAST enhances significant privacy and efficiency.
The Merkle tree collects multiple possible spending scripts. In simple terms, merkle trees can prove that certain information exist in a dataset, without revealing the entire dataset.
Bitcoins are locked to the merkle root of MAST outputs. Senders wishing to spend those Bitcoins, reveal the script which they are using to unlock them and the proof that the script was included in the merkle root of the previous transaction. Validating nodes cannot access the possible conditions which did not execute on the blockchain. As a result, this feature provides scalability and obscures “unnecessary” user information.
BIP342
BIP342 introduces Tapscript, which is an update of Bitcoin’s scripting language. It allows Bitcoin nodes to accommodate Schnorr Signatures, Taproot outputs and possible future upgrades.
The addition of new opcodes like OP_CHECKSIGADD and OP_SUCCESS enables the above functionalities.
Taproot Expectations
The activation of Taproot took place on block 709632. Apart from efficiency and scalability, the Taproot activation can possibly initiate the integration of new functionalities on the Bitcoin blockchain. Therefore, we shall expect more use cases of multi-sig transactions and smart contracts on the network. This is because the upgrade can hide the origins of a massive amount of signing participants in a smart contract and create more block space. In addition, the privacy of Lightning Network transactions could also emerge as a use case.
Currently, approximately 57% of Bitcoin nodes are actively supporting the upgrade. Moreover, average Bitcoin users have to wait until their wallets are compatible with the upgrade, in order to facilitate Taproot transactions. This can take months or even years if we anticipate a similar adoption rate like SegWit. Upon wider adoption by miners and wallets, more space on blocks can probably lead to a significant reduction in transaction fees.
