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What Is Taproot? Understanding Bitcoin’s Milestone Upgrade

dYdX
dYdX
What Is Taproot? Understanding Bitcoin’s Milestone Upgrade
dYdX
dYdX

Bitcoin’s (BTC) pseudonymous founder, Satoshi Nakamoto, left the crypto community in 2011, but that hasn’t dampened the spirits of blockchain developers. Since Nakamoto’s departure, Bitcoin development has continued to blossom as programmers submit Bitcoin Improvement Protocols (BIPs) to tweak the leading cryptocurrency’s code. 

Although there are hundreds of influential BIPs now on Bitcoin’s GitHub page, three proposals called “Taproot” stand out as the most significant in recent crypto history. From a trading perspective, Taproot’s adjustments aren’t noticeable; for crypto developers, however, Taproot has major implications for Bitcoin’s utility and usability. 

Let’s get at the “root” of what Taproot is, how it works, and why it’s such a big deal for the Bitcoin Network. 

What is the Bitcoin Taproot upgrade? 

Taproot was a 2021 update to Bitcoin’s blockchain that sought to enhance features like security, scalability, and efficiency. Bitcoin Core developer Greg Maxwell introduced the idea for Taproot in 2018, and fellow cryptographers elaborated on Maxwell’s contributions in succeeding years. 

When lead developers put Bitcoin Taproot up for a vote, it contained three Bitcoin Improvement Proposals: BIP 340, BIP 341, and BIP 342. Developers ensured Taproot was backward-compatible with older models of the Bitcoin blockchain (aka a “soft fork”); so, even if BTC nodes didn’t opt-in to the upgrade, they were still able to process transactions on Bitcoin. 

Unlike a “hard fork” update, Taproot didn’t introduce new foundational rules for Bitcoin or create a separate cryptocurrency network like Bitcoin Cash (BCH) did in 2018. 

Bitcoin Taproot was generally well received in the crypto community, and 90% of BTC nodes agreed to implement Taproot in June of 2021. Programmers gave BTC node operators until November 14, 2021, to update their Bitcoin Core software to version 21.1 to take advantage of Taproot’s new features. 

How does Bitcoin Taproot function? 

Taproot builds upon Bitcoin’s 2017 Segregated Witness (SegWit) upgrade, which was also a soft fork aimed at making BTC transactions more efficient. Specifically, SegWit focused on maximizing the data space in each BTC block by separating (or “segregating”) the digital signatures people use to verify their private keys and approve transactions.

Instead of including signatures in each Bitcoin transaction block, SegWit created an “extended block” to confirm and store this info off-chain. Estimates from YCharts suggest removing signature data from SegWit blocks freed up 65% extra space for data in each batch of BTC transactions, thus reducing fees and improving Bitcoin’s scalability. 

Rather than altering data storage in each Bitcoin block, Taproot modifies the cryptographic signature procedures when transferring BTC. Unlike Bitcoin’s original Elliptic Curve Digital Signature Algorithm (ECDSA), the crypto Taproot upgrade introduced Schnorr signatures to compress the data nodes need to collect and record when users send BTC. Schnorr signatures aggregate public keys and signatures from Bitcoin wallets, decreasing the technical burden on BTC nodes and speeding up the transaction process. 

For example, under the Taproot upgrade, it’s impossible to distinguish transactions from single or multiple-signature (aka multi-sig) Bitcoin wallets. In a multi-sig wallet, two or more owners hold different private keys, and each user must submit their unique digital signature simultaneously to approve a transaction. In the ECDSA model, nodes must approve each signature and public key separately, but Schnorr makes it possible to aggregate all of the keys and signatures into one transaction set. So, even if multiple people transfer BTC from a wallet in the Taproot system, it appears as a single transaction.   

Taproot also introduced functionalities such as Merklized Alternative Script Trees (MAST) to further condense complex transaction data into single hash functions. With MAST and Schnorr signatures, nodes have a lower data burden than in the ECDSA system, which has positive implications for transaction speeds, data availability, and average fees. These features also reduce the computation requirements for advanced functions like automated “smart contract” programs, increasing the potential use cases of the Bitcoin blockchain.

How does Taproot impact the Bitcoin blockchain?

By streamlining digital signatures and compressing data requirements, Taproot makes transferring Bitcoin more convenient from a speed and fee perspective. However, Taproot’s benefits go beyond lower transaction costs and rapid transfer confirmations. The features Taproot offers introduce security and scalability enhancements to create unique value propositions for Bitcoin users. 

  • Privacy: Taproot doesn’t introduce anonymity protocols found in privacy-focused coins, but the key aggregation capabilities from Schnorr signatures help obscure transaction details. It’s more difficult for blockchain analytics firms to distinguish Bitcoin transfers from single or multi-sig wallet addresses under the Taproot model. 

  • Efficient data storage: Another benefit of Schnorr signatures is they reduce the data storage requirements for nodes on Bitcoin’s blockchain. Taproot’s inclusion of MAST further reduces the amount of energy needed to verify and broadcast Bitcoin transactions, thus freeing up precious space on-chain for higher transaction throughput and advanced applications. 

  • Scalability: Taproot didn’t make BTC transfers instantaneous, but it simplified the transaction signing procedures for users and node operators. The lower computational requirements to post new transfers help increase transaction throughput and decrease average fees, making it easier for Bitcoin to meet increased network demand. 

  • Greater utility: Besides improving the peer-to-peer (P2P) transfer experience on Bitcoin, Taproot’s features open the doors for more complex functions or add-on features on the Bitcoin blockchain. For example, the updated data processing makes creating decentralized applications (dApps) with automated smart contracts on Bitcoin easier for programmers. Since Taproot’s launch, Blockchain developers have been building exciting new projects like decentralized finance (DeFi) dApps and virtual collectibles using Taproot Bitcoin as their base layer. 

Bitcoin Taproot’s applications: A few emerging use cases 

After Taproot went live, crypto enthusiasts began putting this update to the test with dynamic Bitcoin-based dApps and creative digital art projects. Time will tell which of these new features will endure, but Bitcoin’s post-Taproot ecosystem is expanding at a rapid pace. 

  • DeFi: As the earliest smart contract-enabled blockchain, Ethereum (ETH) holds the top spot for DeFi activity, including crypto trading, lending, and borrowing. However, with the Taproot upgrade, implementing smart contract commands on Bitcoin DeFi dApps is more manageable for developers. Some layer-2 projects (e.g., Stacks and Rootstock) are experimenting with building DeFi features with Bitcoin’s Taproot-enhanced blockchain. 

  • Ordinals: According to founder Casey Rodarmor, the goal of the Ordinals Protocol is to “Make Bitcoin Fun Again.” Introduced and implemented in early 2023, this new software leverages Taproot’s upgrades to allow anyone to add (or “inscribe”) virtual metadata into Bitcoin’s smallest increments (aka satoshis). Put another way, with the Ordinals Protocol, users can create virtual collectibles called non-fungible tokens (NFTs) on the Bitcoin blockchain. Ordinals trading skyrocketed in the months following its introduction, and many major NFT markets like Magic Eden now support Ordinals. 

  • BRC-20 tokens: Although Ordinal NFTs stole the limelight following the Taproot upgrade, it’s also possible to create fungible tokens using Bitcoin’s Taproot system. Named with reference to Ethereum’s “ERC-20” token standard, BRC-20 tokens are cryptocurrencies that leverage Bitcoin’s blockchain for network security. With the BRC-20 token standard, dApp developers have the freedom to create digital assets with limitless potential applications, including synthetic copies of real-world assets, in-game currencies, or DeFi rewards. 

  • Taproot Assets on the Lightning Network: The Bitcoin Lightning Network is a layer-2 application on top of Bitcoin that uses a scalable channel architecture for fast and low-fee BTC microtransactions. To incorporate features like Schnorr signatures into their design, Lightning Network developers introduced the “Taproot Assets” protocol for enhanced user privacy. According to the team at Lightning Labs, Taproot Assets leverages the strengths of Taproot to provide a more seamless and secure experience for converting between the Lightning Network and the main Bitcoin blockchain. 

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