What is Taproot?
The Beginner’s Guide to the Taproot Bitcoin Upgrade
Taproot is an upgrade to Bitcoin that aims to improve the privacy and efficiency of its network. Taproot is the first upgrade to Bitcoin in four years, since Segregated Witnesses (SegWit) went live in 2017.
The Taproot update encompasses three Bitcoin Improvement Proposals (BIPs), including BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), BIP342 (BIP – Tapscript).
BIP-Schnorr introduces “Schnorr Signatures,” a faster, more secure and less data-intensive way to authorize transactions. BIP – Schnorr also enables BIP – Taproot, which uses a technique called “MAST” to commit less smart contract transaction data to the blockchain while also obscuring some private transaction information. Finally, BIP – Tapscript outfits Bitcoin with an upgraded transaction programming language which utilizes Schnorr and Taproot technology. Tapscript also allows developers to implement future Bitcoin upgrades more efficiently.
Taproot was first proposed by Bitcoin core developer Gregory Maxwell in January 2018. The proposal was widely supported and reached a consensus for implementation from a majority of Bitcoin miners on June 12th, 2021. Taproot is expected to activate in November 2021.
How Bitcoin Transactions Work
In order to understand the significance of the Taproot upgrade, it is necessary to know how Bitcoin transactions are processed today. Bitcoin wallets function similarly to traditional bank accounts in that both an "account number" and "password" are required to access the funds held in the wallet. When users create a wallet, they generate a unique cryptographic key pair – one public and one private – which allows them to send or receive bitcoin. The public key acts as the "account number" and the private key like the "password."
Private keys can create a cryptographic signature to authenticate transactions and account for the distribution of coins, thereby preventing bad actors from stealing coins or otherwise misappropriating funds.
A cryptographic signature, derived from the transaction details and the private key, is required to execute and validate the transaction. Anyone can see this signature on the blockchain and independently verify its authenticity.
The Taproot upgrade implements three BIPs:
BIP340 – Schnorr signature technology implements a smaller, more secure and flexible type of cryptographic signature. It also introduces a technique called “key aggregation,” which enables multi-signature transactions (where multiple parties endorse a single transaction) and smart contracts (where predetermined conditions must be met to execute a transaction) to commit the same amount of data to the Bitcoin blockchain as a standard, single signature transaction. With Schnorr Signatures, a single aggregated public key and a single aggregated signature are both recorded, rather than all of the public keys and signatures of all involved participants. The result is a lighter blockchain load, where observers cannot decipher whether a transaction includes single or multiple endorsers. Of note, Schnorr signatures are backward compatible with the cryptography algorithm Bitcoin has used since its inception, called Elliptic Curve Digital Signature Algorithm (ECDSA). This enables service providers such as exchanges, custodians and wallets to opt in to upgrading over time.
BIP341 – Taproot builds on the privacy innovations of the most recent Bitcoin upgrade, SegWit, and implements Merklized Alternative Script Trees (MAST), which allow for only the executed conditions of a smart contract transaction to be committed to the blockchain rather than the full details of all other possible outcomes. Merkle trees are widely used in cryptography as a way to prove data exists in a set, without having to reveal the entire set. By exposing only the details of the executed transaction, Taproot offers greater privacy to Bitcoin users. With Taproot, those auditing the chain would be unable to view unexecuted transaction conditions or outcomes, which may have contained sensitive private information such as what type of wallet was used. MAST should also provide greater scalability, transaction throughput and efficiency, since unexecuted transaction information is no longer recorded on the blockchain.
BIP342 – Tapscript updates the Script coding language used to write bitcoin transaction parameters in order to accommodate Schnorr Signatures and Taproot technology for those that opt-in to the upgrade. Tapscript will also make it easier to implement future updates to Bitcoin by allowing new types of opcodes (transaction instructions) to be more seamlessly introduced.
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While the full impact of this upgrade will be proven over the coming years as more service providers adopt the technology, the incremental improvements of Taproot are anticipated to be significant for Bitcoin’s long term viability.
Taproot’s privacy and efficiency benefits are two sides of the same coin. By committing less transaction information to the blockchain, less transaction data is available for anyone checking Bitcoin’s publicly available ledger. Committing less data also creates space in each block for more transactions, which should reduce fees and increase transaction throughput.
Taproot also opens the doors to greater smart contract flexibility on Bitcoin. While complex smart contracts have been easy to create and enforce on other blockchain networks for years, Taproot is anticipated to lay the technical foundation needed to accelerate Decentralized Finance (DeFi) on the Bitcoin network. With Taproot's implementation, Bitcoin can host massive smart contracts with tens of thousands of signatories while obscuring all participants and retaining the size of a single-signature transaction.
Taproot upgrades should also enable the Lightning Network to scale more efficiently and rapidly. Some believe Taproot, combined with Lightning Network, will advance bitcoin’s utility from a “store of value” to also a “medium of exchange,” further validating bitcoin as a true peer-to-peer digital cash.
While the upgrades Taproot brings to Bitcoin are important, arguably the most significant and longest lasting impact of Taproot will not be what it is, but how it is implemented. As the first major update to the Bitcoin protocol since the infamous block size wars that led to the creation of Bitcoin Cash four years prior, Taproot will likely establish the operational foundation for how BIPs develop from ideation to implementation in the years to come.
Want to learn even more about the Taproot upgrade? Download Kraken Intelligence’s “Taproot Primer – An Upgrade for the Ages”
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