The number one cryptocurrency in the world, Bitcoin, has seen many changes, both good and bad, since its launch in 2008. However, despite being a giant, the network is not perfect. Many upgrades, even controversial ones, have been introduced to the blockchain to improve its major issues.

After the introduction of Segregated Witness (SegWit), the Bitcoin network did not receive any new important upgrades until last year. After reaching a 90% consensus among crypto miners, a new upgrade was introduced to the network. The new upgrade, Taproot, was activated on November 14, 2021, with the mining of block 709,632.

With the introduction of Taproot, Bitcoin’s issues with scalability and privacy have been significantly mitigated. This article outlines the workings of the Taproot upgrade, where it came from, and how it benefits the Bitcoin network.

Who Created the Taproot Upgrade?

The Taproot upgrade is a result of several forward-thinking developers coming together to bring innovative solutions to the problems with the Bitcoin network. Greg Maxwell, a leading crypto developer, came up with the idea of the upgrade in 2018.

After his proposal, four more developers, Pieter Wuille, Tim Ruffing, A. J Townes, and Jonas Nick, joined him. Together they wrote three BIPs (Bitcoin Improvement Proposals) that serve as the foundation of the Taproot we have today.

What Is the Taproot Upgrade?

First unveiled in 2018 by Bitcoin Core developer Greg Maxwell, the Taproot upgrade is a soft fork of Bitcoin’s blockchain network. Composed of three Bitcoin Improvement Proposals (BIPs), Taproot positively improves the Bitcoin network in terms of cost, security, and efficiency.

Prior to the introduction of Taproot, the Bitcoin network struggled with two significant issues: scalability and privacy. The Bitcoin was built with the Proof of Work (PoW) consensus mechanism and designed to process up to 7 transactions. However, now that the network is the giant of the cryptocurrencies, the transaction speed has significantly reduced, and fees have increased. In 2021, the network’s fees were as high as $60.

Even though blockchain transactions are pseudo-anonymous (they don’t come with a name or address attached), all transactions on Bitcoin are available to the public. What this means is that having a person’s wallet address gives you access to their entire transaction history.

With the Taproot upgrade, particularly its core BIP, Schnorr Signatures, transactions on the network will be hidden, and it will condense more transactions to fit into a single block.

Taproot will also allow Bitcoin to process smart contracts, lines of code that contain the terms of an agreement between two parties, and eliminate the need for a middleman. Smart contracts on the Bitcoin network will help to introduce decentralized finance (DeFi) and, eventually, non-fungible tokens (NFTs).

What Does the Taproot Upgrade Involve?

As mentioned earlier, the Taproot upgrade comprises three important Bitcoin Improvement Proposals. Each BIP serves an important purpose and plays a significant role in bringing flexibility, scalability, and security to the Bitcoin network.

BIP 340: Schnorr Signatures

Developed by Claus Schnorr in 2008, Schnorr Signatures is a cryptographic signature scheme that optimizes the validation process on the Bitcoin network.

Before the introduction of the Taproot, Bitcoin used the Elliptic Curve Digital Signature Algorithm (ECDSA). Satoshi Nakamoto, the creator of Bitcoin has expressed that ECDSA was favored over Schnorr Signature Algorithm because the former was more popular, well understood and secure.

However, the Schnoor signatures implemented the following changes:

• Signature Aggregation: Schnorr Signatures uses its linear maths to increase the number of transactions. Multiple signatures are condensed into one to be validated against one public key. Before the new scheme, a validator would need to validate each signature against a public key, slowing down the transaction time by a margin. Now, validators can validate over one signature at a time and ultimately fit more transactions into a single block.
• Batch Verification: Under the Schnoor signatures scheme, signature aggregates mentioned above are verified all at once. This way, the transaction time is cut, and the fees charged on each transaction reduce significantly. Ultimately, the network can process more transactions at a time because the network saves space by combining multiple data into one signature aggregation.
• Privacy: Further, the aggregation process will make it difficult to distinguish between transactions. Single signature transactions are carried out by a single user, while multi-signature transactions are more complex and often involve two or more users. Mixing in single signature transactions with multi-signature transactions improves the privacy of the network.

BIP 342: Taproot

The creator of Bitcoin allows users to build lines of code called scripts that determine how Bitcoins are to be spent in a transaction. A user can include conditions like time lock releases or multi-signature requirements to their code to make the transaction more complex. However, the problem with this is that each line of code is data that must be written on the blockchain. As such, complex transactions require more inputs and ultimately take up a lot of data storage on the blockchain. When the blockchain is overrun with so much data, it slows down the transaction speed.

Additionally, because all conditions of the transaction are written on the blockchain, which is public, a user’s sensitive data is exposed.

The second BIP, Taproot, uses Merkelized Abstract SyntaxTree (MAST) to summarize the scripts included in a transaction. Using Merkle root, a compact data structure, Taproot makes it unnecessary to reveal the entire transaction script. Under MAST, only the executed conditions of the transaction are revealed and stored on the blockchain, allowing the rest of the script data to remain hidden and protected.
This BIP allows for more smart contracts on the Bitcoin network. because transactions now take up less space on the blockchain network. It also allows the blockchain to run faster because it is not burdened with storing all the data for each transaction.

BIP 342: Tapscript

The final BIP ties the remaining two together. Tap script is an updated version of the original Bitcoin script, the protocol’s programming language that determines how transactions are locked and unlocked.

Tapscript can be referred to as a language, but it is really a collection of opcodes with commands that make way for the other BIPs explained above.

Tapscript also lifted the cap on script sizes, which stood at 10,000 bytes. This allows for much larger scripts, paving the way for smart contracts on the Bitcoin network.

How Does the Taproot Upgrade Improve Bitcoin?

​​Perhaps the most significant benefit of the Taproot upgrade to the Bitcoin network is improved privacy. Alongside heightened privacy comes more security. If the data on a transaction is hidden, the risks of attack are reduced.

Most of the functions on the Bitcoin network are significantly improved. The signature aggregation speeds up the transaction processing time, allowing for more transactions per block.
The quickened pace of transaction processing also reduces the transaction fees because transactions are not validated one by one.

Also, MAST allows room for larger scripts and smart contracts. It also improved Bitcoin’s scalability because it reduced how much data is stored on the blockchain.

One more benefit not mentioned earlier is that Schnoor signatures introduced SigHash, a hash function, to transactions. This hash makes it impossible to change scripts. If the scripts are ‌changed, the transaction is rendered invalid. This is because the information in a script cannot be manipulated without the SigHash being destroyed. Previously, the malleability of a transaction meant that malicious actors could make it appear as though the transaction never happened; this scenario is known as the double-spending problem.

Taproot and Smart Contracts

The taproot upgrade makes significant and beneficial improvements to the taproot upgrade. One other benefit is smart contracts. With the introduction of Schnorr Signatures, more transactions could fit into a block, occupying less data/space on the blockchain. Smart contracts are lines of code that contain the terms and agreements of a transaction between individuals with no middle-man.

With Taproot solving Bitcoin’s scalability issues, Bitcoin now hosts smart contracts on its base chain; allowing it to compete with Ethereum.

The playing field has been levelled, and Bitcoin can compete against Ethereum, the home of DeFi. Bitcoin has the potential to host decentralized applications and other functions under the DeFi movement. The use cases for Bitcoin may also expand past everyday use to include loans, non-fungible tokens and payments of large ticket items like rent.

What Does This Upgrade Mean for Investors?

The Taproot upgrade is largely technical with most of the details going on behind the scenes.

Stakeholders and investors may not be directly affected by the change. Investors who have been paying attention to Bitcoin and changes in the cryptocurrency industry understand the Taproot Upgrade is the first step in what seems like a bright future for Bitcoin.

For now, the larger plan for Bitcoin involving DeFi and smart contracts has yet to be implemented. Investors may have merely noticed the drop in transaction fees, allowing them to save more on transacting costs.

In the future, however, should taproot and subsequent upgrades succeed to expand the use cases for Bitcoin, entrepreneurs and investors may benefit from investing in peer-to-peer financial services dApps built on the Bitcoin network. The Taproot upgrade resulted in a more stable and secure and privatized network, which is the perfect foundation for long-term use cases.

Conclusion

Having examined all the aspects of the Taproot Upgrade, it is obvious that the upgrade was a big needed development on the Bitcoin network. The upgrade not only provided solutions to the network’s issues but also set Bitcoin on the path to competing for a share of the smart contract market share.

However, it is important to remember that this is not the last major development. The Taproot upgrade provided developers with more freedom, allowing them to execute interesting ideas and build innovative projects on the blockchain.