Ask CryptoVantage: What is the Bitcoin Taproot Upgrade?

How do Bitcoin Upgrades Happen?

Because bitcoin is made up of a decentralized network of individual participants, it is difficult to coordinate major changes to bitcoin’s consensus rules. There is no central leader or team who has the authority to direct these changes. Because of this, an overwhelming majority of the network must agree to operate under any new consensus rules.

We require such a large percentage of bitcoin users to support the upgrades because it minimizes the risk of some bitcoin users falling out of consensus with the rest of the network. Because there is no central authority in bitcoin, and there is no one person to make these decisions, it is all or nothing – if everyone agrees to make the changes then they will be made, otherwise they will not.

There are two main methods of adding upgrades to bitcoin: hard forks and soft forks. Hard forks are occur when there is a consensus rule change that is not backwards compatible with previous rules, meaning new bitcoin blocks are not valid under the old consensus rules. In the case of a hard fork, if anyone was still running older bitcoin software that used the old set of rules, they would not accept transactions and blocks that are produced under the new rules. This would cause a split in the blockchain, which is where the term “fork” comes from.

In comparison, a soft fork is when new consensus rules are backwards compatible with previous rules. Soft forks allow bitcoin to upgrade in a way that old nodes can keep running their old software, and everything they do is still valid within the new rules.

The Taproot upgrade is a soft fork. The idea of Taproot has been around for years, and during the past year it has become more formalized. There have been no major objections to Taproot by bitcoin users, developers, miners, or businesses. It is likely that the Taproot upgrade will be “accepted” by the decentralized bitcoin network some time in June 2021, and if that happens then the new consensus rules will take effect later this year.

Privacy Improvements

With the current state of bitcoin, most transaction types are distinguishable from each other by analyzing the bitcoin blockchain.

Most Taproot transactions, in contrast, will look indistinguishable from one another. Regular transactions, multisignature transactions, coin-mixing transactions, and other more complex smart contracts will all look the same to anyone analyzing the blockchain. For example, when you open a payment channel on the Lightning Network, you send bitcoin to a 2-of-2 multisignature address. Anyone looking at the blockchain can see that you sent money to a two-of-two multisignature, and will know that you are likely opening a Lightning Channel.

With Taproot, the 2-of-2 multisignature will be indistinguishable from a regular bitcoin transaction, and blockchain analysis companies will have a harder time spying on bitcoin users.

Smart Contract Improvements

One of the most notable smart contract improvements with Taproot also provides additional privacy. Currently, bitcoin smart contracts need to be put on the blockchain and proven in full when they are being spent.

With Taproot, smart contracts can be constructed in a tree-like structure where only certain branches need to be revealed. Imagine we have a smart contract that says that either Alice or Bob can spend a bitcoin. Currently, if Bob spends the bitcoin, anyone can look at the blockchain and see that Alice also had the ability to spend it. With Taproot, when Bob spends the bitcoin, only that part of the smart contract is revealed on the blockchain, protecting Alice’s privacy.

Since Taproot allows us to keep large parts of smart contracts off of the blockchain, we will be able to create much larger and more complex smart contracts. In bitcoin, transaction fees are paid per byte of transaction data, so large smart contacts are currently infeasible because you need to put all of the data on the blockchain. With Taproot, since we only need to put a smaller subset of the data on the blockchain, we can use much more advanced smart contracts. The more advanced smart contracts will enable a lot of exciting new features to be developed on top of the current bitcoin network.

Scalability Improvements

Another feature that is coming with the Taproot upgrade is Schnorr signatures, a new type of cryptographic signature that can be used to spend bitcoins. Schnorr signatures are smaller than the signatures currently used, which means we will be able to put more transactions into each block. Schnorr signatures will also allow for signature aggregation – for example, ten signatures can be aggregated into one which will reduce the amount of data needed to send those transactions.

There’s another big efficiency benefit to using Schnorr signatures. Currently, in order to actually know what the state of the blockchain is (to be able to tell that the bitcoin you are receiving is real) you need to download and validate all transactions so you know which bitcoins belong to who. Taproot transactions will use Schnorr signatures which can be validated much, much faster than the current signatures in bitcoin. This will which make it significantly faster for new nodes to download and validate the blockchain.