What is Taproot
Taproot is a melting pot of various technical innovations throughout Bitcoin’s history into one upgrade. It was first proposed by Greg Maxwell in 2018. Since then, the three Bitcoin Improvement Proposals (BIPs) that codified Taproot were written by Pieter Wuille, Tim Ruffing, A.J. Townes, and Jonas Nick, and merged into Bitcoin Core in Oct. 2020.
At the root of the upgrade are “Schnorr signatures.” Bitcoin has been using a cryptographic scheme Elliptic Curve Digital Signature Algorithm (ECDSA) for its “digital signatures” where a user signs a transaction with their private key in order to approve sending it somewhere else.
BIP-Schnorr introduces “Schnorr Signatures,” a faster, more secure, and less data-intensive way to authorize transactions. BIP – Schnorr also enables BIP – Taproot, which uses a technique called “MAST” to commit less smart contract transaction data to the blockchain while also obscuring some private transaction information. Finally, BIP – Tapscript outfits Bitcoin with an upgraded transaction programming language that utilizes Schnorr and Taproot technology. Tapscript also allows developers to implement future Bitcoin upgrades more efficiently.
In addition to being smaller and faster that ECDSA, Schnorr signatures have the added benefit of being “linear,” a combination that will boost Bitcoin’s transaction privacy and allow for more lightweight and complex “smart contracts” (an encoded contract with self-executing rules).
Taproot will have many positive repercussions for various projects across the ecosystem. For instance, multisignature transactions, which require more than one out of a group of signers to sign a transaction, will be cheaper and will use fewer data.
Smart Contracts
The most important change from Taproot is the potential for smart contracts, Dowling says.
“Schnorr signatures can be leveraged to let bitcoin users execute more complex smart contracts than bitcoin can currently accomplish today,” she says. “That’s big, because one of the key differences between bitcoin and newer blockchains like Ethereum is their suitability for smart contracts.”
Smart contracts are digital agreements written in code and stored on the blockchain. They’re essential in powering decentralized finance, or DeFi, applications and nonfungible tokens, or NFTs, for example. Ethereum’s smart contract capabilities have in part allowed it to become the most-used blockchain.
Compared to Ethereum, “bitcoin has historically been much more limited in accommodating smart contracts,” she says. “But, while bitcoin likely won’t ever be as flexible as Ethereum from a smart contract standpoint, with Taproot that gap will now narrow.”
This will likely lead to an increase in day-to-day applications for bitcoin.
Privacy
The Taproot upgrade aims to increase privacy for certain transactions.
To do this, Schnorr signatures will ultimately allow for multi-signature transactions, or those that involve multiple addresses, to appear as a standard, single transaction. Multi-signature transactions are often used to enable smart contracts, among other things.
As a result, multi-signature transactions will be indistinguishable from simple transactions, meaning greater anonymity and privacy for addresses involved in multi-signature transactions.
Though Dowling describes this as a “big benefit,” some are concerned that it may cause more government concern over bitcoin and illegal activities such as tax evasion or money laundering.
Less Transaction Fee
Schnorr signatures would also reduce the amount of data needed for multi-signature transactions, which are more complicated to process than standard ones.
“With less data involved, transactions will become more energy and time efficient,” says Tyrone Ross, CEO of Onramp Invest, a firm that helps advisors with digital-asset management.
As a result, transactions will be cheaper to process, leading to lower cost of transaction fees.
What might be the Future Outlook
Once in place, Taproot will “set the foundation for the next phase of innovation in the bitcoin protocol,” Dowling says. “We expect this upgrade to unleash a new wave of innovation in bitcoin focused mainly on smart contracts.”
More importantly, investors must remember that all cryptocurrencies come with risks due to their volatile and speculative nature. Financial experts warn that investors should only invest what they can afford to lose.
