Upgrades to Bitcoin are crucial for the advancement of the network and to include new functionality that will improve it in the long term. Taproot was a long-awaited upgrade that improved the privacy and efficiency of the Bitcoin network. With Bitcoin’s strenuous governance process the Taproot soft fork was one of the most anticipated upgrades in years. This upgrade was the first since Segregated Witnesses (SegWit) was released in 2017, which was the most significant Bitcoin upgrade up until now.
This guide will explain what the Taproot upgrade is, which elements were added to Bitcoin’s functionality, and how these changes affect the network.
The limitations of the Bitcoin network
The activation of SegWit (BIP141) saw Bitcoin increase its block size and implement major improvements with signatures. These improvements increased the network’s transactions per second (TPS) up from 5 TPS. At this stage, Bitcoin only processes around 7 TPS, which is why transactions can become costly during periods of high usage. This is still exceptionally low compared to other blockchain networks like Polkadot or Solana that can process thousands of transactions per second.
The SegWit upgrade to Bitcoin paved the way for the Lightning network’s inception by creating a solution to scaling that didn’t involve increasing the block size. The increase in block size used to be a heated debate in the community when considering Bitcoin’s future and is referred to as the “blocksize wars”.
Due to the nature of Bitcoin’s public decentralized ledgers, all details of Bitcoin transactions made on the network are visible. This pseudo-anonymity allows only the owner of a wallet to stay unknown, but besides that, individuals can see a wallet’s entire transaction history, which compromises privacy.
To address these limitations, the international team of Bitcoin Core developers (also known as “maintainers”) monitor and improve the Bitcoin blockchain. Bitcoin Core is the most widely used software used to connect to the Bitcoin network. The maintainers are funded by companies like Block (formerly known as Square), Coinbase, BitMex, and others to maintain and secure Bitcoin’s network.
What is Bitcoin Taproot?
Bitcoin Taproot is an upgrade to the Bitcoin network that was activated on November 14, 2021, at block height 709,632. It was first proposed by Bitcoin Core developer Gregory Maxwell in 2018 and reached a consensus by miners on June 12, 2021. This three-year wait is a prime example of Bitcoin’s strenuous governance process. This lengthy process ensures that thorough research is done, all key players take part in developing the best possible solution for where the Bitcoin community wants the network to go, and then to reach a consensus on the proposal.
Taproot consists of three Bitcoin Improvement Proposals (BIPs) that change the way Bitcoin’s scripts operate and also adds new functionality. Included in the Taproot upgrade are BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), and BIP342 (BIP – Tapscript). By integrating these new improvements, Bitcoin users gain more privacy, increased network efficiency, and decreased cost of complex transactions – among other things.
Put simply, this upgrade builds on the network by adding new code and cryptographic principles that allow multiple signatures to be hidden, which improves privacy. It also uses a smaller amount of data per transaction, which increases efficiency by improving transactions per second. This should in turn help create cheaper transactions. Finally, it brings in an improved coding language to better implement new changes to the network. Much like a computer software patch, the network continually receives upgrades that secure the network and add new functionality.
Elements of the Taproot upgrade
There are three Bitcoin Improvement Proposals (BIPs) that have been integrated into the Taproot upgrade.
Schnorr signatures (BIP340)
To move or spend a coin users must sign the transaction (similar to a password). This signature is proof that the user is the real owner before a transaction can be processed. Schnorr signature technology is a digital signature scheme just like Elliptic Curve Digital Signature Algorithm (ECDSA) used in Bitcoin currently. A new feature called signature aggregation combines multiple signatures into one. This means that complex transactions and smart contracts that require multiple signatures are transformed into a single signature. Rather than including all the public keys and signatures of the involved parties, adding unnecessary volume to the block.
Did You Know?
When developing Bitcoin, Satoshi Nakamoto had to settle for the ECDSA signature scheme, because Schnorr was patent protected at that stage. Since then, the patent has expired, and the scheme has been integrated into Bitcoin.
By merging multiple signatures, the size of the transactions becomes smaller, allowing an increased amount of data that can be stored per block. This also benefits privacy since an outside observer can’t determine if there were multiple signatures on the transaction, or even what type of transaction it is. Someone looking at the entry from the outside would only see a peer-to-peer transaction.
Taproot builds on the Merkel tree updates of SegWit and has implemented the Merkelized Alternative Script Tree (MAST). This cryptographic tool is widely used to prove that data exists in a set without having to go through the entire set.
One of the practical implications of Taproot (BIP341) is that the work required to verify a set can be greatly reduced since it only adds the executed conditions to the blockchain. This is as good as buying a bag of tomatoes, looking at the first one or two, and then automatically knowing that the rest of the bag is fine. Wouldn’t that be a time saver?
Before the upgrade, all of the scripts would be added to the block, an unnecessary amount of data. With the possibility of privacy issues arising as the transaction information is automatically revealed on the blockchain. Now, a single MAST transaction can represent multiple scripts, greatly reducing the amount of storage required on the network. This method of storage and verification provides greater scalability and also increases privacy for those who transact on the network.
Tapscript is an update for Bitcoin’s scripting language that’s used to write transaction parameters. These parameters are called opcodes and are basically instructions that transactions operating through the Bitcoin protocol need to follow. The scripting language works with Schnorr and Taproot to enable the new and improved script hashing i.e being able to aggregate multiple signatures. The language also adds more flexibility to Bitcoin smart contracts and can make it easier to implement new updates in the future.
Did You Know?
Bitcoin can use smart contracts (i.e. if a condition is met a function will execute). However, Taproot will not enable Bitcoin to use the same complex smart contracts that exist in other blockchains like Ethereum and Solana. These smart contracts are the ones used to power DeFi, NFTs, and blockchain games. The odds are very small that they will ever be used here because this type of smart contract is widely considered to be unnecessarily risky for Bitcoin’s Layer 1.
How does the Taproot upgrade affect Bitcoin?
While the Tapscript upgrade included in Taproot laid a lot of foundational groundwork for future improvement of the network, the other improvements have important privacy and efficiency benefits that are felt now.
The Schnorr signature upgrade brings multiple benefits to the network. By enabling key and signature aggregation, multi-signature transactions become much less cumbersome for the network. By making these entries less data-heavy there is more space in each block, which theoretically should increase transaction throughput and in turn reduce transaction fees, helping with the scalability of the network. Taproot also does this by only including executed transaction information.
This also affects privacy since both Taproot and Schnorr signatures conceal more data by applying new cryptographic principles. With MAST omitting unnecessary data like unmet conditions on a smart contract or unexecuted transactions – which may contain sensitive information – it improves privacy. Similarly, Schnorr signatures improve privacy by aggregating keys and signatures and by making the type and participants of transactions unknown.
Future Bitcoin upgrades
When looking towards the horizon, Tapscript may one day open the doors for decentralized finance (DeFi) on the Bitcoin network. By improving the language, developers have been given more flexibility to their smart contracts. With better scalability, efficiency, and privacy the Bitcoin network can process much more complex transactions with much less effort without compromising on privacy. This may well push Bitcoin out of the category as just a “store of value”.
The upgraded functionality of the Bitcoin network is paramount to its continued success as a digital currency. With the industry in overdrive and Bitcoin no longer being the only fish in the sea, updates are necessary to ensure the continued safety and efficiency of its infrastructure.
If you’d like to know more about the lightning network, hard and soft forks, smart contracts, or anything else crypto-related, check out the rest of the great content on Swyftx Learn.