• Bitcoin is expecting its most significant upgrade in four years after over 90% of miners signaled support for the softfork
• The update promises more privacy, lower transaction fees and smart contract functionality

Bitcoin’s Taproot update – the most anticipated change to the Bitcoin blockchain since the Segwit softfork in 2017 – has received the green light after over 90% of miners signaled support.

In its most basic sense, Taproot is a bundle of several improvement proposals that seek to bring greater privacy to the network and make transactions cheaper, faster and easier, and also – crucially – allow for the deployment of advanced smart contracts.

The upgrade was first proposed in 2018 by Gregory Maxwell, a Bitcoin Core (BTC) contributor, and former chief technology officer at Blockstream.

Without being too technical, this article describes how Taproot will enable these benefits once it goes live sometime around mid-November.

Near-unanimous approval

Many wondered whether Bitcoin would ever agree on an upgrade given that reaching consensus among a large, diverse, and dispersed group of participants can be extremely difficult.

SegWit, which was introduced four years ago to increase the blockchain’s capability of processing more transactions per second, was marred with controversy. The upgrade, often referred to as the 'last civil war', resulted in multiple camps that hard-forked from the original blockchain, creating new altcoins.

Taproot, in contrast, has received near-universal support with more than 90% of all blocks that will be mined in the current period signalling support for the upgrade. This support was evaluated through the Speedy Trial activation mechanism that gave miners three months to signal whether they wanted to support the Taproot upgrade or not.

Czechia-based Slushpool was the first mining pool to signal for the upgrade.

What exactly is changing?

Understanding Taproot requires examining a few functions that underpin transactions in the Bitcoin network. Specifically, Pay-to-Script-Hash (P2SH), which allows for conditions to be specified in order for funds to be unlocked. What this means is that when coins are spent, it’s necessary to reveal all the possible conditions that were met to all network participants. There are two key downsides here:

A) Privacy issues

B) Data intensive (especially if there are many conditions), impacting scalability

Taproot will ensure that P2SH transactions appear indistinguishable from other transaction types to enable greater privacy and enhance scalability. In order to achieve this, it introduces several key improvement proposals: Schnorr signatures,  Merklized Abstract Syntx Trees (MAST) and a new scripting language called Tapscript.

Currently, the Bitcoin network relies on the Elliptic Curve Digital Signature Algorithm (ECDSA), based on a private key controlling the Bitcoin wallet while ensuring that only the rightful owner can spend those Bitcoin. The Taproot upgrade will shift the technology from ECDSA to a new signature scheme known as Schnorr signatures. Developed by German mathematician and cryptographer Claus-Peter Schnorr, Schnorr signatures have several benefits, particularly for smart contracts, and could unlock massive potential for the Bitcoin network.

Under the current design with ECDSA contracts, multi-sig transactions record the signature of each multi-sig participant individually. Schnorr signatures, on the other hand, allow multi-sig signature transactions to be recorded as one signature on the blockchain, thereby making the transactions more lightweight in data – in turn, lowering transaction costs – while also boosting privacy.

At the time Satoshi Nakamoto wrote the Bitcoin whitepaper, Schnorr signatures were not available for commercial use as they were protected by U.S. Patent 4,995,082 up until late 2008. It is widely believed that had they been available, Satoshi would have opted for this digital signature scheme.

MAST, on the other hand, is a data structure that employs Merkle Trees – the ability to prove some information of a given data set without showing the entirety of the set – with ASTs (or abstract syntax trees), that add logic to transactions by allowing the user to split a program into its individual parts. Put simply, MASTs improve smart contract capabilities in Bitcoin, making it easier for users to set more complicated conditions for a transaction while preserving privacy by revealing only the relevant parts of the contract when spending. 

Tokarev commented: “A common criticism of Bitcoin is that it is limited in what it can do. Expanding smart contract capabilities to the network while boosting privacy will make the Bitcoin network way more functional and competitive.” He added. “Perhaps we'll soon see the leading cryptoasset become more of a player in the growing DeFi sector - the primary driver of innovation on the Ethereum network ”

Taproot locking in comes at a pivotal moment for Bitcoin. The cryptoasset was last week adopted as a legal tender by the small Central American nation, El Salvador, which passed a law to legalise the cryptoasset as the currency alongside the US dollar in an unprecedented leap of faith. 

Following the news on June 12 that the Taproot upgrade had enough mining support to lock in activation, the price of Bitcoin jumped 10% to almost $40,000.