Taproot completes the first major upgrade to the Bitcoin network since August 2017.
Recent Bitcoin upgrades
Even though it may appear to be a somewhat conservative network, Bitcoin is no stranger to updates. In August 2017, it launched SegWit (Segregated Witness), a protocol upgrade designed to help Bitcoin scale. That led to the launch of the Lightning Network, a scaling solution that allows transactions on the Bitcoin network to operate at a large scale with near-instant transaction finality. Although the Lightning Network has not yet been adopted on a grand scale, it is one of the key components to the mass adoption of Bitcoin.
What is Taproot?
So when Bitcoin upgrades, it really does so in an impactful way, and Taproot is no different. After being passed with a 90% consensus among Bitcoin miners, Taproot will overhaul and improve transaction efficiency, privacy and support deployment of smart contracts on Bitcoin. Taproot is a soft fork of the Bitcoin blockchain, an agreed change to its code that will impact all transactions going forward.
In technical terms, Taproot introduces Merkelized Abstract Syntax Trees (MASTs), enabling senders and receivers to sign off on a settlement transaction together. It also implements Schnorr Signature, an algorithm that reduces the visible difference between regular and multisig transactions by aggregating signatures into one for a single transaction. Another possible use case is the modification of private and public keys of users, so the legitimacy of each transaction can be verifiably confirmed. It enhances the anonymity of smart contracts by making them look like simple transactions.
What does Taproot mean for Bitcoin?
As so often with upgrades, the features won’t tell you much about what that actually means for you as a user. In plain English, Taproot allows Bitcoin to be more scalable, more private and equips Bitcoin with more functionality to launch smart contracts (and eventually applications). For instance, with a Schnorr Signature, you can send a simple payment or use the Lightning Network or use a multisig transaction, and they all look the same. This greatly enhances privacy for users, but it also enables larger or more complex transactions to be deployed. Moreover, by reducing transaction size, it also reduces transaction fees. This enables smart contract transactions, which are usually bigger in size.
On a very basic level, Taproot is another key component to making Bitcoin more scalable and, with it, more usable for the masses. Bitcoin proponents that often look down on other blockchains with in-built smart contract functionality (like Ethereum) will tell you that Taproot will eventually render those altcoins and alternative blockchains obsolete. The argument goes that if Bitcoin can support smart contracts thanks to Taproot, it makes sense to build decentralised finance applications on Bitcoin, as it is the most robust and secure blockchain. In the long run, Bitcoin would be able to fulfil its value proposition of becoming not only a store of value, but also an alternative monetary system, with the blockchain as the base layer.
For now, the deployment of Taproot will likely see increased interest by investors, so don’t be surprised if Bitcoin sees another push towards the upside as 2021 draws to an end.
