Bitcoin Taproot Upgrade and How it Works
The Bitcoin Taproot Upgrade is a Bitcoin Improvement Proposal (BIP). This upgrade is an important one that enhances Bitcoin’s privacy and scalability. Additionally it creates a foundational base for other future projects and improvements to Bitcoin’s network.
Bitcoin Taproot Upgrade Explained
The Bitcoin Taproot upgrade happened at the same time as another two upgrades. This is because they complement and support each other.
The Bitcoin upgrades are:
- Schnorr Signatures – This is a new signature design. It has more capabilities and is more efficient than ECDSA (Elliptic Curve Digital Signature Algorithm). ECDSA was Bitcoin’s previous signature design. Schnorr Signatures goes hand in hand with Taproot.
- Taproot – This upgrade submits less information to the blockchain. That is to say just enough to properly record the transaction, but excluding the unnecessary details on the blockchain. It also bundles many transactions together. As a result it makes transactions more private.
- Tapscript – Is a better programming language for transactions. It also will help Bitcoin developers to make future upgrades faster.
The Bitcoin taproot upgrade combined with Schnorr signatures makes transactions private. To clarify this is the case when you combine public keys.
You can combine public keys in what is called ‘aggregation’ by using a multi signature wallet. A multi signature wallet combines the private keys of the different wallets to create one new and unique private key.
In the past you would have needed all 4 public keys to make the one transaction. However with Taproot this multi signature new private key is the only one that is needed to make payments.
Electrum is an example of a free wallet that allows you to create multi signature wallets. To clarify that includes any wallets you want to combine whether hot or cold wallets.
As a result the signature will look like any other signature on the blockchain. No one can tell the difference between a complex transaction and a straight forward peer-to-peer transaction.
Bitcoin Taproot Upgrade: MAST
MAST is short for Merklized Alternative Script Trees. It has a specialised use case in Bitcoin’s own DeFi network. The script will only allow the bare minimum details of a smart contract to get logged on the blockchain. As a result it will give some privacy to smart contract users.
The interesting thing with MAST is that you can have a number of different scripts that can spend Bitcoins. That is to say Bitcoin from the same pool of Bitcoins. So for example you can have a standard multi sig wallet and smart contracts that can spend the same funds.
The different scripts or wallets do not need the others to grant them access to spend the funds. Additionally the other scripts and wallets might not even know how many other ways there are to spend the funds.
All that is needed is for the wallet to approve the transaction. Or for any one of the scripts to supply the right answer and the Bitcoin will get transferred. To clarify you can have many hundreds of scripts or wallets that can combine to create the one Taproot output.
As a result MAST has big potential once it gets used in Bitcoin smart contracts. It can get applied a number of different ways. Most importantly to automate payments that really do not need anyone to manually sort. This will make things more efficient and ultimately save on costs.
Advantages of the Bitcoin Taproot Upgrade
The Bitcoin Taproot Upgrade’s main aim is for more privacy and scalability on the Bitcoin network. Both privacy and scalability work hand in hand in this case. This is because the less information you have on the blockchain the less storage space is needed. Therefore it makes the network more efficient and will cost less.
Apps that are supported on the blockchain will also have this privacy structure applied to them. For example the lightning network and CoinSwap will benefit as well.
Taproot Does Not Guarantee Privacy
The Bitcoin Taproot upgrade does help with privacy, but not that much. Privacy has to do with fungibility. In fact we wrote an article covering this topic: is Bitcoin Fungible.
You can use multisig wallets to combine private keys from different wallet addresses to throw off blockchain analytics tools. Like for example Chainalysis a company at the forefront of blockchain analysis. However you have to take care how you use your wallet address.
To clarify third parties might already know your one Bitcoin address. For example if you send Bitcoin from a regulated exchange directly to your wallet address. Or even if you send it directly to your multisig wallet address.
Additionally if most of the rest of the network is not taking precautions it will not matter what you do.
In fact this is what Nic Carter a Bitcoin advocate has said about the Bitcoin Taproot Upgrade:
Incremental is the word right. We are not going to get an order of magnitude enhancement to either privacy or scaling, but we will get a considerable enhancement.Nic Carter
If most of the network is not private, blockchain analytics companies can still piece together what is happening. However the more people use DeFi apps or multisig wallets, the better privacy will get on the network.
This is because the blockchain analytics companies will have more gaps of information to fill. However nothing is better than having privacy by default on the network.
Firstly this is because you don’t have to take additional steps to have privacy. Secondly you do not have to rely on other people on the network to know what they are doing. Privacy by default is guaranteed privacy no matter what. Hence why some cryptocurrencies have privacy by default to make the best privacy coins.
Bitcoin Taproot Activation
The miners on the network had to vote democratically on whether they wanted the Bitcoin Taproot upgrade to go through. Miners had to submit their vote by including a taproot signal bit in the blocks if they wanted the upgrade.
The progress on the upgrade got displayed on Taproot Watch.
To clarify, 90% of miners needed to vote in favour of the Bitcoin Taproot upgrade. Additionally the community needed the go ahead by 11th August.
Unlike previous Bitcoin upgrades, Taproot was not controversial and was expect to go through without a hitch. In fact this was the case.
Bitcoin Taproot Activation Date
Thanks to the SegWit upgrade done a while back, Taproot only required a soft fork to implement it.