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Explained: What is Bitcoin's Taproot upgrade and why does it matter

Explained: What is Bitcoin's Taproot upgrade and why does it matter
Photo Credit: Pixabay
12 Nov, 2021

The world’s first and most valuable cryptocurrency is set to get its first major upgrade in four years. Called Taproot, the update rolls out in two days and is coming days after Bitcoin hit an all-time high of $69,000. While the current price hike has largely been attributed to inflation in the United States (US), Taproot might help the price curve even higher.

In short, the upgrade makes the Bitcoin network more efficient and reduces transaction fees. It was formalized early this year and has the backing of 90% of the network’s miners. The upgrade will start rolling out on November 14.

What is the Taproot upgrade?

While Taproot is usually referred to as one update, it’s actually an amalgamation of three Bitcoin Improvement Protocols (BIPs) — BIP 340, 341 and 342. BIP is a formalized system of updating the Bitcoin protocol, under which updates are rolled out once the community reaches a consensus. The Taproot update was first proposed by Bitcoin core contributor and chief technology officer (CTO) of blockchain firm Blockstream.

The three updates introduce a cryptographic system called Schnorr Signatures Algorithms (SSA), and a data structure called Merkelized Abstract Syntax Trees (MAST), which will change the underlying codebase of Bitcoin and how modernize the core technology behind the platform.

What makes Taproot upgrade a game-changer? 

SSA is based on an algorithm written in 1989 by German mathematician Claus Schnorr. A typical Bitcoin transaction involves multiple inputs and each of them requires a separate public key for validation. Schnorr allows the Bitcoin network to combine several public keys and store them as one public key to generate a single signature that can be used by all parties. By combining the keys, SSA reduces the size of the signatures resulting in smaller data size on the blockchain, which also leads to smaller transaction sizes, lower fees, and faster transactions.

It also makes it more difficult to track Bitcoin transactions using public wallet addresses. With SSA public tracking platforms might be able to track the total transactions to a wallet, but it will be much more difficult to trace down a single user. In a way, it’s similar to cash transactions in our current banking system.

The use of SSA addresses a common concern amongst the Bitcoin community, that it is not private enough. The Bitcoin network was built for accountability, but the same public system also made many users uncomfortable. SSA is sort of a middle path.

That said, SSA isn’t the only thing about this update that interests people. MAST simplifies how smart contracts are implemented on the Bitcoin protocol, and again helps reduce transaction fees.

Smart contracts basically allow users to add conditions to a Bitcoin transaction. But in the current system, each condition becomes a new script, which is then hashed separately, thereby increasing the total size. MAST condenses all conditions into one single script, bringing down the overall size and allowing transactions to process faster.

At the moment, about seven transactions happen per second on the Bitcoin network, and transaction fees can go up to $75-100. While it’s unclear how much of an impact Taproot will have on this, its promise is to make transactions faster and cheaper.

Do all blockchains get such updates?

Every Blockchain network relies on a set of protocols that define how information can be shared across the network. These protocols are upgraded from time to time, to add new features or improve efficiency. A case in point is Ethereum Improvement Protocol 1559, popularly known as the London Hard Fork, which introduced a new way for transactions to be validated on the Ethereum network and will allow the platform to process more transactions per second. 

Taproot is also a set of protocols, but for the Bitcoin Network, which is more decentralized in nature. It is also the biggest upgrade since SegWit (Segregated Witness), which was implemented in 2017 to increase the block size.

How does it help Bitcoin compete with other cryptos? 

Transactions in the Bitcoin network are verified through a process called mining. However, the network can only process a certain number of transactions in a given time frame. As the volume of transactions grows on the network, this can become a problem. Currently, the Bitcoin network can process up to 7 transactions per second (tps) at a block time of ten minutes, while Ethereum can process up to 15 tps. Ripple is the fastest and can process up to 1,500 tps. Block time is the time it takes to process a new block of transactions on the network.

Taproot, theoretically, reduces the latency in the transaction throughput on Bitcoin considerably by compressing the data size of multisig transactions. This would help it compete better with its rival cryptos, especially Ethereum. The privacy upgrades will also allow Bitcoins to compete with privacy coins such as Monero and Dash that are designed to obfuscate wallet addresses and prevents observers from tracing transactions. 

Will Taproot lead to wider adoption of Bitcoin?

Bitcoin doesn’t really have an adoption problem, but smart contracts have always helped a platform gain more users. 

Further, both transactions and conditions that need to be fulfilled for their execution take up space, which shoots up the transaction fees. A reduction in transaction fees would attract more users to the Bitcoin network and would also encourage more merchants and businesses to accept it as a mode of payment.