June 24 2021
DeFi 101

Heard about Bitcoin’s next major upgrade? Why you should care about Taproot

Bitcoin Taproot Update 101

4 min read

Bitcoin’s last major upgrade, Segregated Witness (SegWit) in 2017 led to the blockchain splitting or hard-forking into two chains: Bitcoin and Bitcoin Cash. Now the king of crypto is set to experience another major upgrade, Taproot. The first and biggest upgrade it has experienced in four years is set to be activated in November this year.

<text-h2>What is Taproot?<text-h2>

Taproot is a major Bitcoin upgrade that aims to enhance the privacy, security and simplicity of Bitcoin transactions. It is a soft fork upgrade that won’t require Bitcoin holders to do anything extra.

When you initiate a simple transaction by sending Bitcoin, it publicly broadcasts the Bitcoin blockchain of that transaction — meaning that anyone on a Bitcoin block explorer can see which address sent how much BTC to who at what time. Besides the simple scenario, there are other more sophisticated transactions that are carried out on the Bitcoin blockchain involving multi-signatures and timelock releases.

These transactions are made public on the Bitcoin network which also includes some level of pseudo-private details of those involved in the transaction. For example, the Bitcoin public addresses of multiple parties who collectively approve a transaction can be all seen on the public ledger. Before Taproot, this kind of user data was in plain sight, a feature that could use some level of better privacy.

Apart from exposing details, the transaction data, which are nothing more than fancy scripts, add more data to the Bitcoin blockchain and make it complex from a data structure perspective.

<text-h2>How does Taproot solve these problems?<text-h2>

With Taproot, complex transactions for instance involving multi-signatures can be combined into one signature and appear just like a normal single transaction. In other words, even if a Bitcoin transaction requires multiple transactions or a sophisticated smart contract to approve a BTC transaction, Taproot makes it possible via Schnorr signatures to make such transactions appear like a single peer-to-peer transaction.

Developed by Claus Schnorr, in simple terms, Schnorr signatures are algorithms that simplify Bitcoin transactions by aggregating multiple keys embedded in a Bitcoin transaction into one single signature.

This means user details can be hidden from the public blockchain to further enhance anonymity and privacy.

<text-h2>Tell me more about the key benefits of Taproot<text-h2>

Enhanced privacy — Unlike the current Elliptic Curve Digital Signature Algorithm (ECDSA) used on the Bitcoin blockchain, Taproot via Schnorr signature facilitates increased privacy. Transactions that involve complex spending conditions, multi-signatures, timelocks or in a Lightning Network channel will no longer look different from single signature transactions. This drastically reduces the details revealed about users on the network apart from the wallet details of the sender and receiver.

Lower transaction fees — Taproot helps to reduce the volume of data generated by complex transactions. Bitcoin network fees are typically determined by how complex this data is. Thus when the complexity of the data is streamlined, the network transaction fees can also be reduced. A huge benefit for all Bitcoin users.

Greater scalability — With Taproot, more transactions can now be generated per each block mined thus facilitating a higher number of transactions per second (TPS). Currently Bitcoin processes about 5 TPS, although the real rate varies. With Taproot, the TPS is expected to increase although the exact estimates are yet to be clear.

Unlike the SegWit saga that split the Bitcoin camp in two, the majority of Bitcoin (94% of the hashrate) miners have signalled strong support for the Taproot upgrade. Fingers remain crossed till November to see its successful full activation. As always, don’t just trust but verify!

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