Bitcoin Taproot Upgrade

Owned by Hashim Omer
Last updated: Nov 30, 2021
4 min read

Taproot is an upgrade to Bitcoin that aims to improve the privacy and efficiency of its network. Taproot is the first upgrade to Bitcoin in four years, since Segregated Witnesses (SegWit) went live in 2017.

The Taproot update encompasses three Bitcoin Improvement Proposals (BIPs), including BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), BIP342 (BIP – Tapscript). 

Taproot was first proposed by Bitcoin core developer Gregory Maxwell in January 2018. The proposal was widely supported and reached a consensus for implementation from a majority of Bitcoin miners on June 12th, 2021.

Taproot is expected to go live on Nov 13, 2021 09:25 UTC (block 709,632).

What is changing

The Taproot upgrade implements three BIPs:

BIP340 – Schnorr signature technology implements a smaller, more secure and flexible type of cryptographic signature. It also introduces a technique called “key aggregation,” which enables multi-signature transactions (where multiple parties endorse a single transaction) and smart contracts (where predetermined conditions must be met to execute a transaction) to commit the same amount of data to the Bitcoin blockchain as a standard, single signature transaction. With Schnorr Signatures, a single aggregated public key and a single aggregated signature are both recorded, rather than all of the public keys and signatures of all involved participants. The result is a lighter blockchain load, where observers cannot decipher whether a transaction includes single or multiple endorsers. Of note, Schnorr signatures are backward compatible with the cryptography algorithm Bitcoin has used since its inception, called Elliptic Curve Digital Signature Algorithm (ECDSA). This enables service providers such as exchanges, custodians and wallets to opt in to upgrading over time.

BIP341 – Taproot builds on the privacy innovations of the most recent Bitcoin upgrade, SegWit, and implements Merklized Alternative Script Trees (MAST), which allow for only the executed conditions of a smart contract transaction to be committed to the blockchain rather than the full details of all other possible outcomes. Merkle trees are widely used in cryptography as a way to prove data exists in a set, without having to reveal the entire set. By exposing only the details of the executed transaction, Taproot offers greater privacy to Bitcoin users. With Taproot, those auditing the chain would be unable to view unexecuted transaction conditions or outcomes, which may have contained sensitive private information such as what type of wallet was used. MAST should also provide greater scalability, transaction throughput and efficiency, since unexecuted transaction information is no longer recorded on the blockchain. 

BIP342 – Tapscript updates the Script coding language used to write bitcoin transaction parameters in order to accommodate Schnorr Signatures and Taproot technology for those that opt-in to the upgrade. Tapscript will also make it easier to implement future updates to Bitcoin by allowing new types of opcodes (transaction instructions) to be more seamlessly introduced.

Impact Analysis

  1. Increased privacy: This does not refer to Bitcoin addresses or enhanced anonymity; it refers to types of transactions. Taproot will make complex transactions, such as those requiring multiple signatures or those with delayed release, indistinguishable from simple transactions in terms of on-chain footprint.

  2. Lower fees: The data size of complex Bitcoin transactions will be reduced, which will lead to lower transaction costs.

  3. More flexibility: A new type of signature will enhance smart contract functionality in Bitcoin, making it easier and cheaper for users to set more complicated conditions for a transaction.

  4. Lightning boost. Taproot will make transactions on the Lightning Network cheaper, more flexible and more private. The Lightning Network is a layer 2 solution that enables faster and more scalable payments that periodically anchor in aggregate form to the Bitcoin blockchain, offering eventual Bitcoin security while amplifying speed and potential throughput.

Impact on Client Funds

There is no impact on client funds. Bitcoin deposits and withdrawals will not be affected. Trading will remain open for the trading pair - BTCUSD.

Software upgrades

The Taproot upgrade is a soft fork, so there is no need to upgrade the software (bitcoin core). Legacy transactions will still be supported. However in order to be able to receive deposits based on the new transaction types, custody systems should upgrade their bitcoin node software to Bitcoin Core version 0.21.1 or even the next Bitcoin Core 22.0

Is there contention?

As always there has been some debate on how to proceed as outlined here, and finally a decision has been made to use the BIP 8 upgrade protocol, where miners would signal their acceptance of the soft fork before hand. The acceptance rate has been more than 90% and the soft fork has been locked in. The only risk is if miner that have signalled their intention to accept the changes, by installing the latest software, somehow decide to revert to an older version. Then this could lead to a chain split.

How will MidChains understand the success of the fork?

MidChains will follow its regular procedure to monitor the upgrade. As it is a soft fork the risks of chain split are minimal. Also a majority of miner have signalled their acceptance of the upgrade.

Regulatory Implications

What are the regulatory implications: None.

Maturity / Market Capitalization:  This is a soft fork so BTC remains the same asset.

Security and Operations: No changes related to custody operations. Taproot offers great privacy in terms of script execution.

Traceability / Monitoring : It will be impossible to tell what is the nature of a transaction based on the output data (basically if is a smart contract or normal private key based transaction). However client will be able to provide any information regarding their transactions if required.

Exchange Connectivity and Demand : No impact

Type of Distributed Ledger Technology (DLT) : No changes

Innovation and Efficiency: This upgrade will reduce transaction costs and improve block validation times. It will allow more complex scripts and great privacy related to script conditions and secrets.

 

References

https://seekingalpha.com/article/4450212-the-bitcoin-taproot-upgrade-is-bigger-than-you-think

https://bitcoin.org/en/releases/0.21.1/

https://bitcoinmagazine.com/technical/taproot-coming-what-it-and-how-it-will-benefit-bitcoin