What is Bitcoin's Taproot upgrade?

Overview of Bitcoin's Taproot upgrade

Unlike the contentious SegWit upgrade of 2017, which led to the creation of Bitcoin Cash, Taproot achieved almost unanimous support, avoiding a divisive hard fork. This upgrade was activated as a soft fork at block 709,632 and incorporated three Bitcoin Improvement Proposals (BIPs):

• Schnorr Signatures (BIP 340),
• Taproot itself (BIP 341) and
• Tapscript (BIP 342).

These BIPs collectively streamline transaction processing by allowing for the aggregation of multiple signatures, thereby making transactions both faster and more compact.

Upgrading to Taproot

Schnorr Signatures

The primary feature of the Taproot upgrade was the adoption of Schnorr signatures, a cryptographic signature scheme. Schnorr signatures offer several advantages over the existing Elliptic Curve Digital Signature Algorithm (ECDSA) signatures:

• Privacy: Schnorr signatures enable the aggregation of multiple signatures into a single signature. This feature improves privacy by making multi-signature transactions indistinguishable from regular transactions, thus enhancing fungibility.
• Efficiency: Aggregating signatures reduces the size of transactions, resulting in lower transaction fees and improved scalability.
• Security: Schnorr signatures offer stronger security properties compared to ECDSA signatures, making Bitcoin transactions more resistant to certain types of attacks

Tapscript

• Taproot introduces a new scripting language called Tapscript, which replaced Bitcoin's existing scripting language of ECDSA.
• Tapscript simplifies the development of more complex smart contracts and enables new use cases for Bitcoin, such as advanced multi-signature schemes and more sophisticated smart contracts.

Activation and deployment

• Taproot was activated through a soft fork, meaning that it's backward compatible with older versions of the Bitcoin protocol.
• The activation process involved miners and nodes signaling their support for Taproot. Once a sufficient majority of the network reached consensus, the upgrade was activated.

Community and developer support:

• Taproot received significant support from the Bitcoin community and developers who recognized its potential to enhance Bitcoin's functionality and address some of its limitations.
• The upgrade was the result of collaborative efforts within the Bitcoin ecosystem, reflecting the decentralized nature of Bitcoin development.

Impact of Taproot on bitcoin transactions

Taproot enhanced privacy by making transactions more efficient and indistinguishable from each other. By aggregating signatures, Taproot makes it more challenging to differentiate between transactions that are simple transfers and those that involve complex scripts. This increased privacy was also important for users requiring discretion in their transactions, such as institutions engaging in sensitive financial operations. 

The reduction in transaction size due to Schnorr signature aggregation leads to lower fees and improved scalability, as the network can accommodate a larger volume of transactions.

Tapscript enables the development of more complex smart contracts, opening up new possibilities for Bitcoin's use cases beyond simple transactions. This efficiency gain was particularly beneficial for complex, multi-signature transactions often associated with smart contracts, enhancing Bitcoin's potential as a platform for such agreements.

The adoption of Taproot was expected to be gradual, mirroring the pattern observed with SegWit, with the full impact on Bitcoin's utility, particularly in the realm of decentralized finance (DeFi), anticipated to unfold over time. 

Bitcoin Ordinals

One noticeable impact from SegWit and the Taproot upgrade was Bitcoin ordinals, a type of non-fungible token for the Bitcoin network. In late November 2023, bitcoin transaction costs rose above the fees on Ethereum due in part to bitcoin ordinals. 

The upgrade even led to the emergence of Taproot-inspired startups, such as the Bitcoin Ordinals-focused development firms Taproot Wizards and Tap Protocol.