Taproot is an upgrade to the Bitcoin network that facilitates more private and secure transactions, while also improving scalability. Comprising a series of changes which alter the way transactions are handled, Taproot also helps enable new functionalities on the Bitcoin blockchain. Taproot is considered the most significant upgrade to Bitcoin since 2017’s SegWit upgrade.

Beginnings

Taproot was proposed in 2018, and is the creation of Bitcoin Core developer, Gregory Maxwell. One of the more active Bitcoin developers and technical contributors, Maxwell’s previous work on the blockchain included the development of deterministic wallets, sidechains, and privacy protection techniques.

The proposal of Maxwell was to address some areas of Bitcoin’s technology. Since its launch in 2009, the original cryptocurrency’s popularity has led to a slowdown in transaction speeds and an increase in transaction fees. Initially developed to handle 7 transactions per second, an increasing user-base meant that Bitcoin’s transaction speed, and transaction fees increased, hitting a high of $60 in 2021. Meanwhile, the details of Bitcoin transactions are visible to anyone on the blockchain – meaning that any user with the relevant address information can potentially view another user’s transactoin history. In developing Taproot, Maxwell sought to enhance Bitcoin’s scalability, privacy, and security by introducing a series of Bitcoin Improvement Proposals (BIP).

The BIP were broadly supported by the Bitcoin mining and development community, which reached a consensus to implement Taproot on 12 June, 2021, and to activate it on 14 November 2021 at block 709632.

The Taproot Bitcoin Improvement Proposals

The Taproot update is a softfork that comprises three BIPs with the following changes:

BIP 340: Schnorr Signatures
The BIP 340 included in the Taproot upgrade implements a new type of digital signature to authorize transactions on the Bitcoin network known as the Schnorr signature. Developed by German mathematician and cryptographer, Claus Schnorr, Schnorr signatures are simpler and more efficient than, ECDSA, the digital signature system previously used by Bitcoin. Specifically, Schnorr signatures utilize an aggregation technique, known as ‘key aggregation’, to enable multiple signatures for a single transaction.

Schnorr signatures record a single aggregated signature – rather than the signatures of every party involved in a Bitcoin transaction. This results in a much lighter computational burden and in enhanced privacy since the individual signatories to a transaction remain concealed.

BIP341: Taproot
In conjunction with Schnorr signatures, the Taproot upgrade itself introduces Merklized Alternative Script Trees (MAST) with BIP 341. Building on the 2017 Segwit upgrade, MAST helps reduce the amount of transaction data included on the Bitcoin blockchain while enhancing network privacy by allowing only the executed conditions of a smart contract to be recorded – as opposed to recording every other possible outcome of that contract. Merkle trees complement the use of Schnorr signatures by proving the existence of a wider data set without revealing it to other parties – only committing data relevant to a specific Bitcoin executed by a specific Bitcoin transaction.

BIP342: Tapscript
In order to facilitate BIP 340 and BIP 341, Taproot introduces a new coding language to the Bitcoin script, known as Tapscript with BIP 341. For users that choose to implement the upgrade, Tapscript introduces opcodes that enable Taproot and Schnorr signature functionality, and is designed to add flexibility to the Bitcoin blockchain for the implementation of future innovations and upgrades.

Why is Taproot Important?

Taproot is designed to significantly enhance the long-term viability of Bitcoin and opens the door to new functionality, possibly including DeFi applications. The upgrade’s BIPs are intended to be complementary: by reducing the amount of information held on the blockchain, Taproot has the potential to both streamline transactions and reduce the potential for privacy violations. Furthermore, those improvements should create space for more transactions per block, and then in turn, reduce transaction fees and increase throughput.

Perhaps the most significant impact of Taproot is the gradual introduction of smart contract-like functionality to the Bitcoin blockchain. Taproot increases the functionality and flexibility of complex Bitcoin transactions. However, for design reasons Bitcoin will not anytime soon be on par with Ethereum’s smart contract functionality.

Finally, the Taproot upgrade helps better exploit the potential of the Lightning Network to help Bitcoin scale up. The Lightning Network is a second layer built on top of the Bitcoin blockchain: introduced in 2017, it was designed to reduce blockchain congestion by allowing token transfers to take place off-chain via direct channels between users. Combined with the Lightning Network, Bitcoin may now embrace even more complex functionalities.