What is the Bitcoin Taproot Upgrade?

Last week on Sunday, 14 November 2021, specifically on Bitcoin’s 709,632nd block, an important upgrade on the Bitcoin protocol was activated. 

The upgrade is known as Taproot, which is actually a group of three Bitcoin Improvement Proposals (BIPs) — BIP340, BIP341, and BIP342. Taproot promises to improve privacy features and make Bitcoin more scalable as more transactions can be verified at a greater speed.

Improving privacy, scalability, and possibly introduces automation

Enhanced privacy features such as a multi-signature transaction can now be aggregated or summarised into a single signature. In other words, the protocol can now spend less time verifying transactions and treat multi-signature transactions like single-signature transactions.

This signature aggregation mechanism is also useful to verify batches of unconfirmed transactions coming from Layer 2 protocols, such as the Lightning Network. Before the upgrade, Layer 2 protocols only provide near-instant Bitcoin transactions, but this still congests the Bitcoin network that secures those transactions.

Using the similar principles of aggregating multi-signature transactions, Bitcoin can now confirm batch transactions more efficiently thanks to the Taproot upgrade. 

Given that it is now possible to speed up multi-signature transactions on Bitcoin, Taproot may pave the way for the development of smart contracts on Bitcoin. Smart contracts are a set of codes that self-executes given that the right conditions are met.

Multiple smart contracts can ‘sign’ a Bitcoin transaction the same way multiple human users ‘sign’ a multi-signature transaction. For example, a Bitcoin smart contract will self-execute given that a product shipment has arrived to the correct destination. This smart contract can sign a transaction that automatically sends funds from the customer’s wallet to the vendor’s wallet.

An upgrade that benefits a lot of the Bitcoin community

As the first cryptocurrency in the world, Bitcoin isn’t known to be flexible. The last major update on the protocol was put into effect in 2017. This was the SegWit update, which changes the way blocks are formatted to solve some shortcomings in the signature verification process. 

The SegWit update is a soft fork, meaning that SegWit operators (nodes and miners) can still process non-SegWit transactions. In spite of that, this update caused a rift in the Bitcoin community — inadvertently creating Bitcoin Cash  (BCH), a hard fork of Bitcoin. 

There was some controversy surrounding SegWit. Some claim that SegWit did not solve the intended problem. The Publius Letters explains that there is a risk of a soft-fork bug, and that “SegWit cannot be undone and must remain in the Bitcoin codebase forever” even after this bug has been discovered.

Fortunately, it has been seven days after Taproot was implemented and no Bitcoin hard fork is being created. The chance of a community civil war occurring is actually very slim, given that Taproot has a near-universal support of miners and node operators. 

Taproot was first proposed by Bitcoin core contributor Gregory Maxwell in 2018, but similar technical discussions that led to Taproot began as early as 2016. June 2021 was the month where Taproot was ‘locked in’ as the community was engaged to accept the inevitable upgrade.

However, the rollout for Taproot didn’t happen only after last week. This delay was on purpose. It was to allow enough time for testing and discovering bugs in the upgrade. The incremental and careful application of Taproot has its roots in avoiding the events of SegWit to reoccur.