Introduction

On the 14th of November 2021, the Taproot upgrade went live on the Bitcoin network. It was the network's biggest change in four years. Unlike the previous SegWit upgrade that led to a 'civil war' on block size limit, which led to the birth of Bitcoin Cash, the soft fork Taproot upgrade did not trigger conflicts.

Bitcoin Taproot (BIP-0341) encompasses three Bitcoin Improvement Proposals (BIPs), BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), BIP342 (BIP – Tapscript) aimed at streamlining transactions, making them faster and cheaper, and improving the network's overall security. Beneath the hood, Taproot batches and scrambles transactions, speeding up the network and enhancing privacy.

Bitcoin Taproot's importance cannot and should not be undermined. Through Taproot, Bitcoin could process more transactions over a shorter time, paving the way for advanced decentralized applications and more sophisticated smart contracts. Taproot was all Bitcoin needed to move beyond its limitations, become a more progressive blockchain network, and remain relevant in the ecosystem.

Bitcoin Basics

Bitcoin is the world's first cryptocurrency—a form of digital money built on a decentralized and immutable ledger secured cryptographically. Before Satoshi Nakamoto created Bitcoin, other iterations of digital cash had recorded lesser success. Although Bitcoin was not an instant hit, it has grown in fame and adoption. From being worth cents between 2008 to 2010, one Bitcoin is worth over $25,000.

In every sense of the term, Bitcoin is a peer-to-peer network. Satoshi designed it to eliminate the need for trusted and centralized intermediaries in the financial sector, replacing them with a transparent network of computers and a public database. These computers, called nodes, could record transaction information in the database in blocks, tying each block to the next and creating a chain.

You can liken Bitcoin transactions to emails sent from one address to another. To send and receive Bitcoins, both the sender and recipient have to control the Bitcoin account's public and private keys. When you send BTC to a particular public address, you sign the message digitally using cryptography. Sending Bitcoin broadcasts your message to the network of miners, who can then verify it. When verified as authentic, the transaction is confirmed and added to the blockchain.

Another essential thing to note is that the Bitcoin network considers previous account inputs when sending bitcoins. If you received 0.5 BTC twice, bringing your balance to 1 BTC, and wanted to send 0.7 BTC, the network will require two outputs (0.5 BTC twice). The remaining 0.3 BTC will return to your account as unspent change. In essence, you send a message and wait for the network to confirm it as genuine, then the intended recipient receives the bitcoins in their wallet.

What is Taproot?

The Bitcoin network performed optimally in its early days. However, as adoption increased and more people transact with BTC, issues like high transaction fees and confirmation delays sprung up. Additionally, Bitcoin's design makes the network incapable of supporting advanced decentralized application deployment. The network was also open to certain security risks and privacy concerns.

To address these issues, Bitcoin Core developers proposed several network upgrades over the years. These changes focused on everything from adopting a bigger block size to ensuring cheaper transactions. In 2018, Greg Maxwell, a Bitcoin Core developer, proposed the Taproot upgrade to enhance privacy, scale, and improve the network's smart contract functionality.

The Taproot upgrade encompasses a trio of Bitcoin Improvement Proposals—Tapscript, the Schnorr signature scheme, and Taproot itself. Although Maxwell proposed the upgrade in 2018, another developer Pieter Wuille extracted it from the Bitcoin Core library before presenting the new consensus rules that the upgrade required to Bitcoin nodes. A whopping ninety percent of Bitcoin's miners accepted the upgrade, and it went live on block 709632.

Primarily, Taproot would increase transaction privacy on the network and reduce fees. Another exciting benefit of the upgrade is the Taproot smart contract, which is more advanced than regular Bitcoin smart contracts. Although it’s worth noting that Taproot is still vastly limited in being a good functioning smart contract when you compare Solidity and Clarity against it.

The Taproot upgrade would also improve scalability, lowering the amount of data uploaded to the blockchain. Taproot would also eliminate the risk of signature malleability, closing the door to the double-spending problem once and for all.

How Taproot Works

To understand how the Taproot upgrade impacts Bitcoin, we must examine each BIP separately.

Schnorr Signatures

Bitcoin initially adopted the Elliptic Curve Digital Signature Algorithm (ECDSA). While effective and widely adopted, ECDSA exerted a higher load on the blockchain overall. The Schnorr digital signature scheme prioritizes simplicity and efficiency and generates shorter signatures than ECDSA.

Using the SDSS, Taproot could achieve signature aggregation. Complex Bitcoin transactions have multiple keys depending on the number of inputs involved. Using the SDSS, these numerous signatures can be compressed into a sole Schnorr signature, consuming less memory than usual and creating space for more transactions in a single block. Through the SDSS, Taproot can even hide any information that points to the running of a Bitcoin script.

Taproot

The upgrade got its name from BIP341, known as Taproot. This particular proposal carries on from the SegWit upgrade. Taproot adopts the Merklelized Alternative Script Tree (MAST) to scale transaction data size on the blockchain.

Bitcoin transactions can go from being a straightforward process to having multisigs, timelock releases, and other complex features. These complexities consume more space on the network since they will require several inputs and signatures. Also, all transaction data is public, including information that could pass as sensitive.

MAST filters most of this information, publishing only the executed states within the transaction to the blockchain. Since MAST requires fewer scripts and a sole MAST transaction can cover several scripts, the data stored on the network reduces significantly, resulting in improved scalability. Also, with MAST publishing only the executed states within a transaction, potentially sensitive transaction data will not make it to the blockchain, thus enhancing privacy.

Tapscript

Tapscript is the one thing that makes SDSS and Taproot possible. Tapscript is an upgrade to the existing Bitcoin script. The new language is a set of transaction instructions known as opcodes. With the new opcodes, the Bitcoin network has become more flexible, allowing smart contract support.

How Taproot Compares to Other BIPs

Impact of Taproot on Bitcoin

Privacy and Security

Taproot has impacted the Bitcoin network, significantly increasing privacy and security. Through MAST, only the executed states of a complex Bitcoin transaction are committed to the blockchain. This way, sensitive transaction data on all the multiple signatures and inputs required for a complex transaction will not make it to the blockchain. Also, signature malleability becomes a thing of the past with the Taproot upgrade, thus increasing the network's security.

Scalability and Transaction Fees

With Taproot, the Bitcoin network can scale further. Batching ensures multiple transactions can be committed to the blockchain, allowing more of the same in a single block. Also, the reduced transaction weight means users will generally pay lower fees to send bitcoins.

Ordinals & BRC-20 Tokens

One of the key advancements that followed the activation of Taproot is the emergence of Bitcoin Ordinals and BRC-20 tokens. BRC-20, which was introduced in January 2023 by a Bitcoin developer known only by the pseudonym DOMO, is a token standard that allows users to create and trade tokenized assets on the Bitcoin blockchain. This has enabled a wide range of use cases, from creating digital representations of real-world assets like real estate and art to creating loyalty programs and rewards systems.

Furthermore, it's worth noting that Taproot has opened up the possibility for a wider range of inscriptions on the Bitcoin blockchain. This breakthrough has led to the creation and trading of Non-Fungible Tokens (NFTs) on Bitcoin, which are gaining momentum and are now commonly referred to as Bitcoin Ordinals.

This development has created a new paradigm in the world of digital assets, opening up new avenues for creativity and innovation in the blockchain space. With the rise of Bitcoin Ordinals, we can expect to see more experimentation with the use of blockchain technology, and new and exciting use cases for NFTs in the future.

Overall, Taproot has had a significant impact on the Bitcoin ecosystem, unlocking new possibilities and use cases for the network. As developers continue to explore and innovate with this new technology, we can expect to see even more exciting developments in the future.

Conclusion

The Taproot upgrade has been a resounding success. It introduces a new signature scheme, upgrades the Bitcoin script, and provides a solution that batches and scrambles Bitcoin transactions. Taproot improves the scalability, privacy, efficiency, and smart contract functionality of the Bitcoin blockchain. As SegWit made the Lightning Network possible, Taproot has brought privacy to Bitcoin and opened up the ecosystem to DeFi and NFTs.

Bitcoin's future is bright. More work remains to be done to bring the blockchain to the complete flexibility of other L1s, but developers have made significant progress. With the emergence of L2s and other future upgrades, the Bitcoin blockchain has already exceeded Satoshi's wildest dreams. It is now the much-needed catalyst for widespread cryptocurrency and DeFi adoption.