In this “What is the Bitcoin Taproot Upgrade?” article, we’re going to dive deep into the latest Bitcoin upgrade. We’ll explore the latest Bitcoin Improvement Proposals (BIPs) and how they work. Plus, we discuss the implications of these updates and the effect they will have on the Bitcoin network. Furthermore, we’ll take a look at the Segregated Witness (SegWit) upgrade that came before Taproot and how it informs the latest set of upgrades.
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What is Bitcoin?
Before we consider the question of “What is the Bitcoin Taproot Upgrade?”, let’s first take a closer look at Bitcoin. Bitcoin is the brainchild of the pseudonymous developer(s) “Satoshi Nakamoto” and is the first successful implementation of a public blockchain. Introduced as a response to the financial crisis in 2008, Bitcoin operates outside of the traditional financial ecosystem.
Furthermore, Bitcoin is decentralized, meaning that it has no single point of failure. Instead, a network of nodes is responsible for carrying out transactions without intermediaries. Bitcoin is a borderless, censorship-resistant, peer-to-peer electronic cash system. Plus, anyone in the world with an internet connection can use Bitcoin to become their own bank.
The underlying blockchain technology that powers Bitcoin is a type of distributed ledger technology (DLT). Each node in the network holds a copy of the Bitcoin ledger. The ledger serves as a record of transactions. Furthermore, each node must reach a consensus about the validity of a transaction before it can be written into the blockchain. All transactions are immutably interconnected using cryptography and computer science, making them exceptionally difficult to manipulate.
Bitcoin is often compared to gold. This is because both Bitcoin and gold share many properties, such as a limited supply and divisibility. Additionally, Bitcoin can serve as a store of wealth and a hedge against inflation.
Moreover, Bitcoin has a maximum supply of 21 million. This is programmed into code, meaning that nobody can create more once this number is reached. Accordingly, the name “digital gold” suggests that this scarce crypto asset could become more valuable over time as we near the maximum of 21 million Bitcoin in circulation.
Bitcoin Limitations
Although bitcoin is a revolutionary, pioneering technology, it is not without limitations. One such limitation is the initial transaction speed of 7 transactions per second (TPS). Compared to the 1,500-2000 TPS that Visa can process, Bitcoin is relatively slow. Another issue is privacy. All Bitcoin transactions are publicly visible on-chain. As such, it is possible to establish an entire transaction history for any Bitcoin wallet address.
Without the capacity to process high volumes of transactions, the Bitcoin network could struggle to scale efficiently and become widely adopted. To remedy this, the Bitcoin community implemented the Segregated Witness (SegWit) update.
Segregated Witness (SegWit)
Before we tackle the question of “What is the Bitcoin Taproot upgrade?”, let’s look at the SegWit upgrade that came before it. The Segregated Witness (SegWit) update went live on Bitcoin on August 23rd, 2017. Proposed by Pieter Wiulle in 2015, SegWit changes the structure of data storage during Bitcoin transactions. Furthermore, the SegWit update addresses the Bitcoin scalability issue to include more transactions in every block and make Bitcoin more suitable for high volumes of transactions.
However, the primary reason for the SegWit update was to fix a bug known as “transaction malleability”. This bug made it possible for bad actors to change the transaction id and hash of a transaction. Although this issue did not pose a significant risk, it prevented the implementation of advanced features like smart contracts. SegWit paved the way for some of the prominent features of the Bitcoin Taproot upgrade, including Schnorr signatures and Merklized Alternative Script Trees (MAST). These features play an essential role in the smart contract functionality of Bitcoin.
By storing signature information from transactions externally from the base transaction block, signatures and scripts are modifiable without the need to change the transaction id. Furthermore, this process makes transactions lighter and introduces the concept of “block weight”. Resultantly, each block can hold more transactions without increasing the block size.
Additionally, SegWit enables Bitcoin to support layer-2 protocols like the Lightning Network. The Lightning Network takes high-frequency transactions off-chain and enables transaction confirmations between as few as two nodes.
Moreover, thanks to SegWit and the Lightning Network, Bitcoin’s scalability issue could be a thing of the past as developers are rushing to build complex applications in Bitcoin. The ability to build features that rely on unconfirmed transactions with little risk opens up many opportunities for Bitcoin and Lightning Network developers.
What is the Bitcoin Taproot Upgrade?
So, what is the Bitcoin Taproot update? Taproot is a soft fork upgrade to the Bitcoin network that aims to improve efficiency. It is the first major upgrade to Bitcoin since the introduction of Segregated Witnesses (SegWit) in 2017. Furthermore, the goal of the Taproot update is to reduce the cost of Bitcoin transactions while making them faster to process. Accordingly, Taproot intends to make Bitcoin scaleable by increasing transaction throughput and lowering costs.
Initially proposed by Gregory Maxwell in January 2018, the Bitcoin Taproot update batches several transactions and signatures together to make verification more efficient throughout the Bitcoin network. Also, Taproot obfuscates transactions with different numbers of signatures to make identifying inputs more challenging. There are three Bitcoin Improvement Proposals (BIPs) included within the update. These are BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), and BIP342 (BIP – Tapscript).
The BIP-Schnorr proposal implements “Schnorr Signatures” to speed up transaction authorization and make it more secure while using fewer intensive computations. Also, BIP – Schnorr makes BIP – Taproot possible. BIP – Taproot uses a process known as “MAST” to minimize the amount of transactional data that smart contracts commit to the blockchain and further protect private transactional information. Additionally, BIP – Tapscript will upgrade the Bitcoin transaction programming language using Schnorr and Taproot technology. Plus, Tapscript introduces features that will make it easier and more efficient to implement future upgrades.
Moreover, the Bitcoin Taproot upgrade has received overwhelming support from the Bitcoin community. As such, the majority of Bitcoin miners reached a consensus for the implementation of Taproot on June 12th, 2021. The upgrade went live on November 14, 2021, at block 709,632.
How Does Taproot Work?
As we discussed earlier, the Bitcoin Taproot upgrade incorporates three Bitcoin Improvement Proposals (BIPs). Below, we take a closer look at these BIPs and how they work, and the impact they will have.
BIP340 (BIP – Schnorr)
BIP340 uses Schnorr signature technology to facilitate smaller and more flexible cryptographic signatures with enhanced security. Also, BIP340 uses a “key aggregation” technique to allow multi-signature and smart contract transactions to use the same amount of data as a single signature transaction. Therefore, less data is committed to the Bitcoin blockchain.
Furthermore, the use of Schnorr Signatures removes the need for every public key and signature to be recorded on the blockchain. Instead, a single aggregated signature and aggregated public key are recorded, reducing the load on the Bitcoin network. Additionally, these transactions are obscured so that anybody looking at them would struggle to tell the difference between a transaction with one signature and a transaction with multiple signatures.
Another interesting feature of Schnorr signatures is backward compatibility with the original Bitcoin cryptography algorithm, the Elliptic Curve Digital Signature Algorithm (ECDSA). This allows exchanges and custodians to implement the upgrade at a convenient time.
BIP341 (BIP – Taproot)
BIP341 – Taproot is an extension of the most recent Bitcoin upgrade, Segregated Witness (SegWit). This improvement uses Merklized Alternative Script Trees (MAST) to prevent the commitment of redundant smart contract data onto the blockchain. Instead of committing information about every possible outcome of a smart contract, only the conditions that have been executed are put on-chain.
Thanks to the use of Merkle Trees, cryptographers can prove the existence of data within a set without disclosing the complete dataset. Accordingly, Taproot enhances privacy by only making executed transactional data public, making the auditing process more secure because unexecuted conditions and outcomes are not visible to auditors. Plus, MAST will enable higher transaction throughput as less data is committed onto the blockchain.
BIP342 (BIP – Tapscript)
BIP342 – Tapscript will provide an upgrade to the Script programming language. Those that opt-in will be able to implement Schnorr Signatures and Taproot technology into the parameters of Bitcoin transactions. Also, the update will reduce friction for future updates using new transaction instructions.
What Will Taproot Achieve?
The full effect of the Bitcoin Taproot upgrade will be seen over time following a series of incremental improvements implemented by the community. As new transactions enter the Bitcoin ledger, each node will have less transactional data to check per transaction. As a result, each block will be able to hold more transactions. In turn, this could reduce the average transaction fee throughout the network.
Also, Taproot facilitates greater smart contract compatibility on the Bitcoin blockchain. Accordingly, Bitcoin will be capable of processing several complex transactions similar to those on Ethereum. As such, Taproot will lay the foundations for decentralized finance (DeFi) on Bitcoin. Additionally, Taproot will help the Lightning Network to scale faster and with less friction. This could see the Lightning Network play an ever-increasing role in the mass adoption of Bitcoin as a medium of exchange.
The benefits of Taproot will enable Bitcoin developers to explore a broader range of complex smart contract-based applications. In turn, this will generate additional use cases for Bitcoin beyond a store of value and hedge against inflation. Moreover, the Taproot upgrade could help Bitcoin to achieve what many believe is its true destiny, as a “peer-to-peer electronic cash system”.
What is the Bitcoin Taproot Upgrade? Summary
After reading this “What is the Bitcoin Taproot Upgrade?” article, you should be able to discuss the latest improvements to the Bitcoin protocol confidently. The implementation of the Bitcoin Taproot upgrade will mark a significant shift towards cohesion within the Bitcoin community following the “block size wars” that ended in the Bitcoin Cash fork as a result of the resistance to the SegWit upgrade. If successful, Taproot could pave the way for the future of development on Bitcoin.
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