What is the upcoming Taproot upgrade for Bitcoin? What does it do?

Like every other blockchain network out there, Bitcoin also gets updated every once in a while, thanks to the Bitcoin core developers. These updates often referred to as soft forks, introduce new features and benefits to the Bitcoin network. The most recent proposed upgrade is dubbed Taproot.

The Taproot upgrade is a compilation of three Bitcoin Improvement Proposals (BIPs), which are design documents for the introduction of features and information to Bitcoin.

For Taproot, the three BIPs are Schnorr Signatures (BIP 340), Taproot (BIP 341), and Tapscript (BIP 342). These three upgrades are known as the Taproot upgrades and are collectively termed as BIP Taproot. The upgrade brings more efficient, flexible, and private ways of transferring bitcoin.

Now, let’s take a deeper look at the three BIPs and what changes they bring.

BIP 340 — Schnorr Signatures (Saving Space — reducing fees)

The protocol allows for the use of Schnorr signatures in the Bitcoin network. In cryptography, Schnorr signatures are digital signatures produced by the Schnorr signature algorithm developed by Claus Schnorr.

As such, BIP 340 would introduce several benefits to Bitcoin like superior privacy, lower fees, and a more flexible multi-sig. The BIP specifies how Schnorr public keys and signatures are to be encoded for use in Bitcoin.

Public keys used for Schnorr signatures are 32 bytes long in comparison to the currently used Elliptic Curve Digital Signature Algorithm (ECDSA’s) 33-byte public keys. Schnorr signatures themselves are 65 bytes long, compared to ECDSA signatures which usually range between 71–72 bytes, including a sig hash flag, which is used to indicate which part of the transaction is signed by the ECDSA signature.

With this change, the small space that would be saved would result in fee savings for Bitcoin users who adopt Taproot.

BIP 341 — Taproot (A more flexible Bitcoin)

In simple terms, the protocol basically defines how Bitcoin’s protocol will integrate Schnorr signatures. Specifically, the Bitcoin Script must be updated so it also evaluates Schnorr signatures. It also integrates Merkelized Alternative Script Trees (MAST), which allows a user to lock output to multiple scripts.

Pay-to-Taproot (P2TR)

Taproot also introduces a new way of spending Bitcoin. Pay-to-Taproot (P2TR) allows a user to switch between either a Schnorr public key or the Merkle root of a variety of other scripts.

The new script type will allow users to create a UTXO, which is a term referring to the amount of digital currency someone has left remaining after executing a cryptocurrency transaction, which can be unlocked and spent by the owner of the private key or anyone who satisfies the requirements of any script within the Merkle tree.

Key Aggregation

Schnorr’s key aggregation feature enables this flexible functionality. When Bitcoin is sent to a P2TR output, it gets locked to a single public key called Q. The public key Q is actually the aggregation of a public key P and a public key formed from the Merkle root of multiple other script types. This allows for any of the alternative scripts in the Merkle tree to be used for spending the output.

This introduces the ability for a user to choose between complex, arbitrary scripts as well as simple pay-to-public-key functionality when spending rather than receiving. In addition, it also makes all the Taproot outputs look similar.

Since multisig outputs, single sig outputs, and other complex smart contracts all look the same on the blockchain, many chain analysis heuristics will become unusable, preserving privacy for all Taproot users.

BIP 342 — Tapscript (Improving P2TR)

To actually implement P2TR, BIP 342 adds and updates several opcodes, which are portions of machine language instruction that specify the operation to be performed. These new scripts help in verifying Taproot spends and Schnorr signatures and are collectively referred as Tapscript.

This was designed to maximize the future flexibility of P2TR spending and to allow for upgrades that have not yet been planned.

How does this upgrade benefit Bitcoin?

The Taproot upgrade benefits both bitcoin users who adopt taproot and those who don’t. In short, spending Taproot outputs are significantly cheaper. The biggest boost comes to Privacy, and the introduction of Schnorr signatures and key aggregation provides enhanced privacy to all Taproot users.

Schnorr signatures also eliminate any signature malleability that might have been present in ECDSA signatures. Transaction malleability was solved by the SegWit upgrade, and Taproot takes care of the malleability of signatures that persisted as a feature of ECDSA. This enhances the security of the Bitcoin network as a whole.

When is the Taproot upgrade coming? (Coming this holiday season)

Due to the decentralized nature of Bitcoin, any major changes to the Bitcoin network require coordination from a global user base to make substantial changes to its code. It also requires coordination among stakeholders to deploy these changes.

At the time of writing, Taproot remains a proposed upgrade but has received a lot of support from the community. The Schnorr, Taproot, and Tapscript upgrades were given BIP 340, 341, and 342 in January of 2020, and have been in development since. Later that year, the code implementation for all three upgrades was completed, tested, reviewed, and merged to Bitcoin Core.

Taproot is being dubbed as Bitcoin’s most ambitious upgrade to date. Miners can now signal their support by including special data in the blocks they mine called a signal bit. If 90% of the blocks mined during this difficult period include the Taproot signal bit, the upgrade would be locked for activation in November of this year.

There is also the possibility of the network not achieving the 90% threshold before the August 11 timeout, which would result in the upgrade failing.

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