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Last November, the Bitcoin protocol underwent the most significant since the 2017 update, called Taproot. What has changed and why is it so impactful? We explain all things Taproot upgrade in this guide.

Key Takeaways

What is a Taproot Bitcoin Upgrade?

Taproot upgrade, the latest major upgrade to the Bitcoin network, went into effect on November 14, 2021, at block 709,632. It was finalized and supported by 90% of Bitcoin miners by June 12, 2021, but a half-year window was necessary for miners to update all their nodes.

If you already think it was a long time in the making, wait until you hear that the proposals included in Taproot were made back in 2018.

Who developed Bitcoin Taproot?

Greg Maxwell authored the Taproot (BIP-341) proposal in 2018, shortly after SegWit became a part of the Bitcoin Core protocol.

The three proposals included in the upgrade, which we will describe later, were codified by Pieter Wuille. Other improvements, such as Schnorr signatures, were being worked on by the two, and Tim Ruffing, A.J. Townes, and Jonas Nick joined later in 2020.

The upgrade found the support of the majority of miners and did not cause a schism because it was a rather straightforward step to improve the protocol. Unlike SegWit, which would change the protocol and require some concessions, the Taproot upgrade built upon it without significant drawbacks.

Note: Soft Fork vs. Hard Fork

There is another important distinction between the Taproot upgrade and the previous updates, such as SegWit, that were contentious and made the community split the blockchain. Unlike SegWit, which was a ‘hard fork’, the Taproot upgrade is what is called a ‘soft fork’.

Soft forks are sometimes called upgrades because they do not require the old chain to become deprecated. Instead, they are backward compatible and can work with older versions. Therefore, there is no need to split the chain to implement changes.

In a hard fork, sometimes called an update, the protocol undergoes breaking changes, so to make the new rules work, there is a need to reach a consensus with the miners or validators. When a hard fork is not contentious, the majority migrates to a new version of the chain and the old chain stops propagating.

However, sometimes the community cannot reach a consensus, and a part of it keeps maintaining the version which did not go through the rewriting of the rules. This is what happened to Ethereum Classic, Bitcoin Cash, and other ‘forks’.

Improvement Proposals in Bitcoin Taproot Upgrade

Since the protocol upgrade is not something that happens frequently, the community decided to implement three Bitcoin Improvement Proposals (BIPs) that were ready at the time. Each of them introduced a new feature to the protocol, so let’s break them down.

BIP-340: Schnorr Signature

The first proposal introduced a new type of cryptographic signature and key aggregation. Schnorr signatures allow multi-sig transactions and even smart contracts to commit a standard amount of bytes to the blockchain.

It works by creating an aggregated key for all senders rather than committing several keys and signatures. Consequently, it makes more complex transactions take up less space in the blockchain, improving latency and privacy.

Schnorr signatures were intended to replace the elliptic curve digital signature algorithm but thanks to being backward compatible with ECDSA, both can coexist for a while. It is also why the upgrade did not require to fork the Bitcoin blockchain.

BIP-341: Taproot

Further improvements to the scalability and privacy of BTC are made with the Taproot BIP. It activates Merklized alternative script trees (MAST) to achieve a similar result for addresses.

Previously, address inputs of complex Bitcoin transactions included data from all participants, while MAST condenses them into a single hash.

What is BTC Taproot address? Essentially, it is a new type of address created by Tapscript.

BIP-342: Tapscript

Tapscript is a scripting language and a technical feature necessary to implement Taproot and Schnorr signatures. It was included in the soft fork to enable batching and hashing logic for all types of outputs.

Implications of Taproot Upgrade: How Does It Change the Bitcoin Protocol?

So why was this upgrade to the protocol necessary, after all? How did it manage to amass 90% support and after years of development pushed to the codebase, despite being a soft fork?

Evidently, it can only mean that the new features are worth the work — and they are.

Lower Latency and Transaction Fees

For one, complex transactions, such as multi-sig become significantly more accessible and feasible. If previously, they took up a lot of block space and took a while to be processed, now they are as quick as a regular transaction. Not only that but in combination with Lightning Network, Bitcoin transactions no longer have to compromise between security and speed. Not to mention, transaction fees for multi-sig transactions are just about the same as for everyone else.

Smart Contracts and Assets

With complex transactions being more accessible, some speculate that smart contracts on the Bitcoin blockchain finally become feasible.

Smart contracts are not new to the Bitcoin network, but previously limited block space and high latency were serious hurdles for their use. Bitcoin maximalists believe this would help BTC to become a player in the DeFi space but months later, it still has a long way to go.

Improved Privacy

Last but not least, Taproot served as a stepping stone in making BTC more privacy-oriented. If previously multi-signature transactions were fully transparent, after Taproot went into effect it became less evident who are the signers.

The same would go for trustlessness and data leakage: if before MAST all hashes were accounted for and traceable in a complex transaction, now it bundles all inputs into a single, special hash. Despite this, the validity of this transaction bears the same weight.

How will Taproot affect Bitcoin price?

{{img src=BTC_1625086800_1662065999_graph_coinmarketcap.png alt=bitcoin price before and after taproot upgrade caption=Source: CoinMarketCap}}

Or, to be more precise, how did it already affect it, since it’s been more than a year? Let’s check out the price chart for BTC from July 1, 2021 (when Taproot was about to be locked in) to September 1, 2022.

In July 2021, the first leg up of the Bitcoin bull run has just finished. In fact, a week after the news about Taproot locking in, BTC reached its local minimum at $29 thousand. From there on, however, the second leg up moved over the next few months. The all-time high at $68,789 was reached on November 10, 2021, just a few days prior to the upgrade rolling out.

Of course, more factors in play affected Bitcoin price, sentiment arguably being the most impactful. Clearly, the news about Taproot boosted the confidence in BTC both in July and November, even though after the exact dates Bitcoin moved to the downside. Most likely, the update and the peak of the bull run just happened to coincide with each other.

The State of Taproot in 2022

Social media may not be the most fail-proof source of reliable information but at least it can give real insights into the topical news and current sentiment of the Bitcoin community. Below, we take a look at a subjective perception of the state of Taproot adoption.

Miner consensus about the Taproot upgrade was 90% but full nodes are a slightly different story. They may include common users, services, and exchanges as well, and apparently about a quarter of nodes chose not to update yet. The current situation seems to mirror the adoption of Lightning Network, which was also a major undertaking with the intent to grow the network over time.

The ideas about all the applications of the upgrade are not based on empty words. Bitcoiners and researchers keep finding use cases for complex transactions, which were previously too costly and clunky. Protocol Labs researchers came up with and tested a Pikachu protocol, a safety measure to prevent posterior corruption attacks on Proof-of-Stake chains.

The poster child of the Taproot benefits for Bitcoin is Taro (Taproot Asset Representation Overlay) by Lightning Labs. It leverages both Taproot and Lightning Network to build a protocol for asset creation and transfer — all secured by Bitcoin’s blockchain. Tagged assets used to leak into Bitcoin script but since the update, MAST became a reliable way of distinguishing between the asset and its extra data.

Speaking of improved privacy, there are applications to be found here, too. Wasabi Wallet is a popular Bitcoin wallet focused on privacy, and it supports features like Coinjoin, an input mixing protocol. Implementing SegWit v1 that includes Taproot upgrade components is a huge task in their pipeline. However, the benefits are hard to ignore: multi-signature support, lower latency for sending and verifying, and less private data exposure.

Conclusion

The Bitcoin Taproot upgrade offers new ways to build on the Bitcoin blockchain, similarly to what SegWit and Lightning Network did. It is talked about less in the Bitcoin community and outside of it because of its non-contentious nature. The reach it had was mainly due to the promise of complex smart contracts on Bitcoin. Now it is up to Bitcoin developers to use the new tools at their disposal.

We hope you learned something new from this article! If you enjoyed it, keep an eye on our blog and social networks: Twitter, Facebook, Telegram, and Reddit.