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Bitcoin's first upgrade in four years, Taproot, is slated to release in November 2021. When Taproot goes live, Bitcoin users will have increased transactional efficiency and privacy. And, what's more, this upgrade unlocks the potential of smart contracts.
Interestingly enough, Bitcoin Taproot was met with an entirely different reception than Bitcoin's 2017 upgrade—the latter is often referred to as the "last civil war" as there are staunch supporters and heavy dissidents. Taproot, on the other hand, has almost universal support among miners and Bitcoin users.
So, what is it that makes Taproot so well-accepted in the Bitcoin community? Let's find out!
There are three parts to the Taproot proposal: BIP 340 (Schorr Signatures), BIP 341 (Taproot), and BIP 342 (Tapscript).
In this guide, we will largely be focusing on BIP 341. However, we will also touch on BIP 340's Schnorr signatures.
Bitcoin MAST is the launching point for the upgrade's proposed improvements. MAST uses a Merkle tree (see image below) to store user-selected conditions that need to be fulfilled in order for BTC to be spent. With MAST, the spender can select which condition they'll fulfill without revealing the other conditions' details to the blockchain. By keeping unused conditions off of the blockchain, users will have increased privacy, be charged lower fees, and have the ability to create larger contracts. What's more, their Bitcoins will increase in fungibility.
Now, let's briefly go over conditions: Let’s say that Jill wants to send Frank 5 BTC, but she wants to set some conditions before Frank can redeem the coins. The conditions could include: (1) Frank can only spend the 5 BTC if he waits a week, or (2) if he wants to spend them before the week is over, he can only access 2 BTC, and the remaining 3 will be sent back to Jill.
Those conditions that we listed above – currently, they would be visible on the blockchain, resulting in decreased privacy. However, the Taproot upgrade aims to use MAST to give extra privacy for complex conditions, and this is done by hashing the potential routes. Instead of every condition being shown within the transaction information, a merklized hash will be produced. This implies two key things:
Smart contracts can be quite resource-intensive, and Bitcoin's blockchain has limited capacity. So, the two might seem like oil and water: an unnatural match. Yet, Andrew Poelstra, a mathematician at Blockstream, may have found an answer to this conundrum.
On November 5, 2017, Poelstra presented "Using Chains for What They're Good For" at the Scaling Bitcoin conference at Stanford University. In the presentation, Poelstra called attention to the potential of "scriptless scripts," which could completely remove certain smart contracts from Bitcoin's blockchain while still retaining Bitcoin's security benefits.
Flash-forward to 2021, and we can see Poelstra's research become a reality as Taproot will enable scriptless scripts. This kind of script is capable of executing smart contracts off-chain via the usage of Schnorr signatures, which we will touch on next. Scriptless scripts have 3 key benefits: functionality, privacy, and efficiency.
The Schnorr signature scheme will be deployed as a soft fork protocol upgrade. The scheme is considered by many cryptographers to be the best in the field because:
Schnorr employs linear math, which allows signature aggregation. Essentially, multiple signatures within the same transaction can be combined, appearing as a single signature. This makes a multisig transaction indistinguishable from a regular one—once again, bringing enhanced transactional privacy to users.
There are several ways in which the BTC Taproot upgrade will improve Bitcoin's technology:
Hard forks typically imply an unstable period for a cryptocurrency—they are quite volatile. Thankfully, though, Taproot is going to be a soft fork. This means that its changes are compatible with the software's previous versions (with a hard fork, newer rule sets are not compatible with older rule sets).
Taproot is going to bring Bitcoin users significant benefits, such as:
With everything mentioned above, Taproot is the most impactful upgrade to Bitcoin since 2017's block size increase. Making amendments to Bitcoin is difficult, and changes are typically met with lots of pushback. That's why it's such a huge deal that Taproot is supported by virtually the entire community; this shows what a big deal the upgrade is and how necessary the changes are. We've still got a couple more months until Taproot is released. Until then, stay tuned to our blog for updates! Here at Paydepot, we keep our finger on the pulse of the cryptocurrency world, and we'd love to pass our findings on to you.