What is Taproot Upgrade?

As the first cryptocurrency ever created, Bitcoin lacks features that some other cryptocurrencies have. Scheduled to be implemented sometime in November 2021, the Taproot upgrade will bring a host of features to Bitcoin, including lower fees, enhanced privacy, and the potential to create smart contracts.

When Satoshi Nakamoto created Bitcoin in 2008, he envisioned the protocol as a “peer-to-peer digital cash.” However, he did not predict the rise of smart contracts and decentralized finance that have taken the world by storm and are expected to become the backbone of the next generation of the internet. As a result, the Bitcoin blockchain has remained simple, with no functionality other than storing and transferring Bitcoins. While this was revolutionary in 2008, Bitcoin’s supporters are looking to make the cryptocurrency more competitive and make it more likely to retain the title of “number one cryptocurrency” in the future.

The Taproot upgrade is a series of changes that will help scale Bitcoin and bring new use cases to the network. The first of these changes is a shift in how transactions are confirmed. To confirm a transaction, a user must prove that they own the address being used to transfer funds, which can be proven with their private key. Using the private key, the user will make a signature that proves that they own the address in question and that any funds transfer is valid. Bitcoin has been using the Elliptic Curve Digital Signature Algorithm (ECDSA) since its launch. It was chosen for its reliability and security, both of which are important for protecting the blockchain.

However, there is a relatively new signing algorithm called Schnorr signatures that greatly expands on its predecessor and offers several benefits to users.

One of the most important benefits is privacy, especially for multi-signature wallets. A multi-signature wallet is a Bitcoin wallet with multiple private keys, each of which is required to confirm a transaction. With ECDSA, the blockchain exposes the fact that a certain address has multiple private keys, which can pose a security threat. Schnorr signatures, on the other hand, compile all the private keys together so that a multi-signature transaction looks no different than any other transaction on the network, and the uniformity makes individual transactions harder to trace, thereby improving privacy. This will help make it easier to implement the Lightning Network, a layer 2 scaling solution that can leverage some of Taproot's technology to ultimately bring better Bitcoin scaling capabilities.

Schnorr signatures can also be confirmed in batches, without the need to verify ECDSA one by one. This means that transactions across the entire network will be cheaper and faster.

Taproot also offers the potential to create smart contracts on Bitcoin due to the reduced computing power and uniform nature of transactions. They will most likely remain much more expensive than Ethereum or other smart contract platforms and have limited functionality. Regardless, the ability for $1 trillion worth of Bitcoin to interact with smart contracts is huge and could help bring smart contract technology into the mainstream.

The upgrade is scheduled to take place around November 2021 and will be carried out via a soft fork. A soft fork means that the blockchain is upgraded without any risk of a hard fork. As Ethereum creator Vitalik Buterin noted, soft forks are somewhat controversial because they force all miners to either upgrade or leave. However, they may be simpler for users. To approve the upgrade, 90% of miners must agree, which can take several months to complete.

Despite the Bitcoin network’s age and simplicity, the Taproot upgrade shows that it is possible to “teach an old dog new tricks.” It will keep Bitcoin competitive with newer cryptocurrencies, provide greater privacy, and move the blockchain closer to its goal of becoming the world’s reserve currency.