Intermediate Series

What Is Bitcoin’s Taproot Upgrade? And Why Does It Matter?

Taproot is the first Bitcoin upgrade in four years and it just went live on November 14, at block number 709,632. The Taproot proposal was first unveiled by Bitcoin Core developer Greg Maxwell in January 2018 and, after almost four years of hard work, it’s finally ready to make an impact on the Bitcoin network.

Taproot will make Bitcoin even stronger. It not only makes transactions more private and efficient, it makes smart contracts on Bitcoin much more powerful. This will make DeFi on Bitcoin and layer-2 scaling solutions, like the Lightning Network, much more functional.

In this article, we look at the three key technologies that make Taproot possible, the seven benefits that Taproot brings to Bitcoin, and see how the upgrade could ripple out across the entire crypto space. Now, let’s dig in.

What actually is Taproot? The technologies that make Taproot so powerful

Taproot is a soft fork that upgrades Bitcoin, improving the network’s privacy, smart contract functionality, and security.

Specifically, the technologies that Taproot introduces to the protocol in the upgrade are:

  1. Schnorr signatures;
  2. Merklelized Abstract Syntax Trees (MAST); and
  3. Tapscript.

1. Schnorr signatures

The digital signatures used on every transaction are being upgraded. Bitcoin was originally designed to use something called the Elliptic Curve Digital Signature Algorithm. It was likely chosen as it was open source, widely used, and secure. Now, a new type of digital signature called Schnorr signatures is being implemented. 

The Schnorr Digital Signature Scheme (SDSS), named after the German mathematician and cryptographer Claus Schnorr, is incredibly efficient and generates short signatures. The key innovation is that the same security level can be achieved using fewer bits of information in the digital signature. Moreover, it allows several signatures in a transaction to be combined into one.

2. Merklelized Abstract Syntax Trees (MAST)

Why does Bitcoin need Merklelized Abstract Syntax Trees? Because every Bitcoin transaction requires a script (instructions a computer can understand) rather than only a digital signature, there was lots of unnecessary data being included on the blockchain. 

MAST helps reduce that unnecessary data, making it possible to either reduce transaction sizes or use more complex smart contracts. Even better, it improves privacy, as you can keep more of your transaction data hidden. 

It works by combining two technologies: Merkle trees and abstract syntax trees (ASTs). Essentially, ASTs let us split our script into separate parts and the Merkle tree lets us verify that any separate parts belong to the same script. 

3. Tapscript

Tapscript is an upgrade to Bitcoin’s scripting language that helps developers take advantage of Schnorr signatures and Merklelized Abstract Syntax Trees. 

7 ways the Taproot Upgrade makes Bitcoin stronger

1. Increased privacy

The new address type makes it possible to ‘cloak’ transaction details. That means that different transaction types can look the same on the blockchain, whether they're a simple payment, a complex multi-signature transaction, or made on the Lightning Network.

2. Lower transaction fees

Users can save on transaction fees, especially on more complex multi-signature transactions. All transactions between Taproot supported wallets only incur the simple fees. 

3. More complex smart contracts 

As complex transactions can be reduced to appear as simple transactions, much more complex smart contracts can be used compared to what was previously possible. This will also make layer 2 solutions like the Lightning Network even more useful. 

4. Signature aggregation

Previously, multi-signature transactions would show the digital signature of everyone involved in the transaction. With Taproot, those signatures can be aggregated into a single unique signature, helping keep their information private.  

5. New use cases

With more complex smart contracts now possible, it expands what’s possible on the Bitcoin blockchain. While there are already some decentralised finance protocols built with Bitcoin, they’re about to become much more powerful. 

6. More transactions per block

As the transaction sizes are smaller, more transactions can be included in every block.

7. Better security 

Digital signatures will no longer be malleable, removing any risks of the double spend problem. This increases the integrity of the Bitcoin ledger even further. 

Taproot beyond Bitcoin 

The name ‘Taproot’ was likely inspired by the Merkle root, a feature of one of the technologies that make the upgrade possible. It also makes a particularly prescient metaphor, and not just because our exchange is called Cointree

A taproot is a type of root system for plants, such as a carrot, where there is one dominant root with smaller roots spouting off it. While there are only a few key changes to the Bitcoin protocol in Taproot, as we highlighted above, they will give root to a number of improvements that massively strengthen the Bitcoin network.

Now, those benefits could grow beyond bitcoin. As more people see the benefits of the Schnorr Digital Signature Scheme, other cryptocurrencies could adopt the technology and make their own protocols more powerful.