What major changes will Bitcoin’s upcoming Taproot upgrade bring?

According to reports, the Bitcoin Taproot upgrade will take effect on November 16.

Regarded as the "most ambitious upgrade" of Bitcoin in years, Taproot does represent extraordinary significance in the industry, especially in the eyes of Bitcoin enthusiasts, and is even "the most important Bitcoin protocol upgrade proposal so far."

But compared with the Ethereum EIP 1559 proposal that caused a great debate in the industry, the Taproot upgrade has not caused much industry attention, and many friends have not even heard of it. So what exactly is the Taproot upgrade, and what changes will it bring to Bitcoin?

01What is Taproot Upgrade?

Taproot Activation

Bitcoin is updated periodically (soft forks of the network), primarily through the introduction of new features and information to Bitcoin in the form of Bitcoin Improvement Proposals (BIPs).

The latest Taproot upgrade is a compilation of three BIPs, namely the Taproot upgrade includes Schnorr signature (BIP 340), Taproot (BIP 341) and Tapscript (BIP 342):

1. BIP340 — Schnorr Signatures

The Schnorr signature plan has long been on the wish list of many Bitcoin developers. As a cryptographic digital signature scheme developed by German mathematician and cryptographer Claus Schnorr, it is mainly known for its simplicity and efficiency in generating short signatures.

One of the main advantages of Schnorr signatures is that they can take multiple keys and produce a unique signature in complex Bitcoin transactions. This means that signatures involving multiple parties can be "aggregated" into a single Schnorr signature, so it is called an aggregate signature.

So in a nutshell, Schnorr signature is mainly about saving space and reducing fees, and is also hailed as the biggest technological update after Bitcoin Segwit.

2. BIP 341 — Taproot

Taproot is a solution based on Schnorr signature. It can include complex transaction conditions and fund usage details, and then provide all of these contents as a new fund usage condition (new lock) to the outside world. This new usage condition and the unlocking method under this usage condition (new key) are supported by Schnorr's linear characteristics.

This provides users with the ability to choose between complex arbitrary scripts and simple payments to public keys when spending (not receiving), and key aggregation makes all Taproot outputs look similar.

So because multi-signature outputs, single-signature outputs, and other complex smart contracts will all look the same on the blockchain, many blockchain analyses will be unavailable, preserving privacy for all Taproot users.

3. BIP 342 — Tapscript

BIP 342 adds and updates several opcodes, which are part of the machine language instructions that specify the operation to be performed. These new scripts help verify Taproot spending and Schnorr signatures, collectively known as Tapscript, maximize the flexibility of P2TR spending and also facilitate future upgrades.

It will improve scripting capabilities and privacy, and can help make smart contracts more efficient and private by only revealing the relevant parts of the contract when spending.

In short, the core of the Tarpoot upgrade lies in the Schnorr signature, and Taproot, based on the Schnorr signature algorithm, can bring new combinations and possibilities to Bitcoin in terms of performance, privacy and even smart contracts.

02Tarpoot upgrade is the most important Bitcoin protocol upgrade proposal

As we all know, Bitcoin uses digital signatures to unlock the unspent balance in UTXO to complete the exchange. Specifically, we can simply disassemble an exchange - taking A transferring a bitcoin to B as an example, the actual process can be divided into two steps: "unlocking" and "locking":

Unlock: A provides his own private key to complete the unlocking, thus proving that this bitcoin belongs to him and can be used;

Locking: A locks this bitcoin with B's public key and then transfers it to B, so that only B can unlock it with his own private key;

That is, Bitcoin needs to be locked with a public key and unlocked with a private key to realize the transfer and exchange of cryptocurrencies. The public key and private key are generated through a digital signature algorithm, and the Schnorr signature mentioned above is a new signature algorithm.

Its most prominent feature is that it can aggregate multiple public keys or multiple private key signatures into a new public key or a new signature. This can be simply understood as turning multiple locks that need to be unlocked at the same time into one lock, and turning a bunch of keys used to unlock into one key.

So from this perspective, the Tarpoot "upgrade package", which is regarded as "the most important Bitcoin protocol upgrade proposal", may bring many changes to Bitcoin.

Performance — similar to Rollup expansion effect

First, the improvement from the performance perspective is the most direct, because Taproot based on Schnorr signature can include complex exchange conditions and fund usage details, and then provide all of these contents as a new fund usage condition (new aggregate signature lock) for external use.

This reduces the amount of data transmitted and stored on the blockchain, allowing a single block to contain more transactions, thereby reducing costs and achieving the effect of expanding capacity (in fact, I think it is a bit like Rollup on Ethereum).

Privacy - Options for enhancing the privacy of the Bitcoin network

Secondly, privacy will also receive the biggest boost, as Schnorr signatures will not make individual Bitcoin addresses on the public blockchain more anonymous, but will make simple exchanges indistinguishable from more complex exchanges consisting of multiple signatures.

At the same time, this also allows users to mask complex smart contracts as ordinary Bitcoin exchanges, bringing greater privacy to users.

03 Bitcoin’s “difficult payment” road

The Ethereum London upgrade, which is coming in July, includes not only the long-awaited proposal EIP-1559, but also a total of 5 proposals including EIP-3198, EIP-3529, EIP-3541 and EIP-3554.

Unlike the thriving ecosystem of Ethereum where borderless innovation is constantly emerging, Bitcoin upgrades have always been very quiet. I believe many friends even feel that the development of Bitcoin may be stagnant.

Especially since 2020, everyone seems to have gradually accepted Bitcoin's positioning as "digital gold", and forgotten the payment attributes of "global currency" that once caused heated debate in the industry and even the "BCH fork". It seems that upgrades in technological applications are not that important.

Lightning Network: Bitcoin Capacity

Just like the "Lightning Network" dedicated to Bitcoin micropayments, after nearly three and a half years of hard work, the number of locked bitcoins finally exceeded 1,500, an increase of 42% compared to the beginning of 2021, setting a historical high, which seems to be a remarkable achievement.

But at the same time, in the past year, the total issuance of Bitcoin-pegged coins on the Ethereum chain has almost started from 0 and exceeded 252,000. After years of hard promotion of the Bitcoin Lightning Network, it is not even a fraction of "ERC20 Bitcoin".

The Taproot upgrade can be regarded as a timely relief, strengthening Bitcoin's usability in terms of payment performance and privacy, including the Lightning Network. If Taproot is adopted, the privacy of the Lightning Network can be improved by making the channel look like a regular Bitcoin exchange, and perhaps Bitcoin's status as a "global currency" can be restored, giving it a greater advantage in the competition with the "digital gold" positioning.

However, whether "digital gold" is becoming more and more popular, or "global currency" is the original intention, perhaps Bitcoin is no longer the same species as all other cryptocurrencies including Ethereum.