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What Is Bitcoin’s Taproot Upgrade and Why Does It Matter?

May 18, 2021
What Is Bitcoin’s Taproot Upgrade and Why Does It Matter?
Taproot is the first significant upgrade to the Bitcoin blockchain since 2017, aiming to bring improvements in privacy, security, and scalability. So what can we expect from the changes?

Bitcoin doesn’t undergo major upgrades very often, so it’s a big deal when one comes along. The last big update in 2017 ended up causing bitter division among the Bitcoin community. The introduction of Segregated Witness (SegWit), designed to make transactions on the network less data-heavy, led to a considerable debate about whether or not Bitcoin should increase its block size. 

The SegWit side achieved enough weight to go ahead with the update. However, before it took place, those in favor of increasing block size initiated a hard fork, and Bitcoin Cash resulted. 

[Read now: All You Need to Know About the Ethereum 2.0 Release (the Serenity Upgrade)]

Given the history, it’s understandable that the Bitcoin community is now watching the progress of the Taproot upgrade with bated breath. The good news is that, at least based on early indicators, Taproot appears to have far broader support among the mining community. 

What changes does Taproot bring? 

The Taproot upgrade aims to make the Bitcoin network faster, cheaper, and more private. The main change introduces a new signature scheme called Schnorr signatures, the driver for which goes back to the last upgrade, SegWit. 

SegWit separated the digital signature for a Bitcoin transaction from the transaction itself. Without the signature, each block could contain four times as much data as before, making the Bitcoin network more scalable. Schnorr signatures represent a further upgrade to Bitcoin’s signature scheme by introducing an additional element of privacy. 

Bitcoin’s lack of privacy is well-known. Although you can transact pseudonymously, once you give someone your address, they can trace all of your transactions using a block explorer. Furthermore, transactions that use complex functionalities such as time locks or multiple signatures stand out even more. 

Taproot offers better privacy

Introducing Schnorr signatures won’t offer full privacy, but it supports multiple signature options, meaning that all signatures can be combined and stored as one, generating less data and making the transaction more straightforward. Furthermore, one transaction will be indistinguishable from any other type of transaction. 

The net effect isn’t just one of increasing privacy. By consolidating multiple signatures into one, each block can carry more transactions, making Bitcoin up to 75% more scalable. It will also reduce the validation load on miners, allowing them to process blocks up to 2.5 times faster. 

Another positive result is that these complex or multi-signature transactions will incur lower fees due to less data processing. 

An upgrade over two years in the making

The decentralized nature of Bitcoin means that upgrades on the scale of Taproot aren’t easy. The software that runs the Bitcoin network is maintained by a relatively small group of core developers.

While they could program a change, they need the buy-in of the mining community to ensure that any changes don’t compromise the integrity of the network. Miners rely on block rewards and transaction fees, so they won’t agree to anything they believe may deter users, as it would lower their earning potential. 

Moreover, any changes also need to undergo an extensive period of testing to ensure that they stand up to real-world usage. 

Taproot has been a long time in the making. It was first coined in January 2018 by ex-Blockstream CTO Gregory Maxwell. It took until May 2019 for the idea to be formalized into a draft Bitcoin Improvement Proposal by Pieter Wuille, a longstanding Bitcoin core developer. 

The proposals went into formal review in January 2020, and even though they had broad support within the Bitcoin community, the debate regarding the correct approach to implementation continued for months. According to one Reddit post, the main reason it took so long was “PTSD from the previous soft fork, SegWit.” 

The Bitcoin community votes on Taproot

By March 2021, the timeline and implementation approach had been agreed upon, and by May, things were starting to move. On May 1, Taproot entered a “Speedy Trial” phase. From that date, miners could indicate their support for the update by including a piece of data, called a “signal bit,” in the blocks they mine. 

The initial voting period will be for two weeks, although more periods are planned over the coming three months. Overall, 90% or more of the blocks mined during the voting periods need to include a signal bit for the Taproot upgrade to go ahead. 

Assuming this happens, Taproot will go live on the Bitcoin network by November 2021, nearly four years after it was first put forward. However, if the consensus isn’t there, the update won’t go through. 

Given the ongoing institutional enthusiasm for Bitcoin and cryptocurrencies, the Taproot update—assuming it passes—isn’t arriving a moment too soon. Furthermore, the fact that it will pass without contention in the Bitcoin community represents a significant step forward from the 2017 update. Hopefully, it provides a blueprint that will ease the way for future upgrades. 

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