Bitcoin’s first upgrade in 4 years: Here’s why Taproot is a big deal

Posted: 12 November 2021 5:40 pm
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Taproot seeks to implement 3 basic changes to Bitcoin's existing framework: increased privacy, security and scalability.

    • Over the course of the weekend, Bitcoin will undergo its most important upgrade since 2017.
    • The upgrade will enable smart contract functionality within Bitcoin's native architecture, allowing for more DeFi-centric use cases.
    • Once live, Taproot will make BTC transactions cheaper as well as make payments easier to process.

A whole lot has been written about Bitcoin's upcoming Taproot upgrade recently, especially with the update slated to go live in the coming days. That said, there are many misconceptions doing the rounds on the Internet regarding Taproot and what it entails exactly. In this article, we will seek to explain in simple terms what the hype is all about and what it means for the Bitcoin ecosystem moving forward.

Taproot is a soft fork that seeks to maximise BTC's operational scalability, privacy and smart contract functionality by employing a new address type. It allows all Bitcoin transactions to appear similar to one another regardless of whether a small payment is being sent across or a large multi-signature transaction is being processed.

By utilizing Taproot addresses, it will become possible for Bitcoin holders to save a lot of money on transaction fees as the upgrade modifies various spending conditions related to the digital asset. It also helps make transaction sizes smaller, allowing for payments to be more uniform and easy to process.

Taproot's implementation is also designed to help facilitate larger and more complex operations within the currency's dev framework, something that was previously not possible. Commenting on the significance of this development Igneus Terrenus, head of communications for prominent cryptocurrency exchange Bybit, told Finder:

"Not only is Taproot Bitcoin's GDPR moment in reducing the amount of data collected on transactions, the reduced amount of data also translates to cost-saving and more transactions per block, opening the door for smart contract deployment. Taproot combined with Lightning Network will provide compounded scalability on the most secure blockchain there is."

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A more technical look at the matter

Providing his insights as to why Taproot is a big deal for the Bitcoin community, Sergio Lerner, co-founder of RSK, a smart contract-enabled blockchain that is secured by the BTC network, told Finder that the upgrade incorporates Schnorr signatures into BTC's framework. As a result, it is possible to reduce the number of interactions taking place between the signatories each time a transaction needs to be processed, adding:

"Currently, threshold schemes are created using multi-sigs, a simple combinational lock that requires specifying every signatory public key and providing a pre-defined number of independent signatures to accept each spending. In contrast, native threshold signatures can compress the agreement between signatories in a single signature, therefore saving a lot of transaction space and fees."

He also highlighted that Taproot enables multi-party protocols such as Lightning Network channels to hide their particularities in standard-looking transactions in cooperative cases, increasing the privacy of such protocols.

Simplifying matters a bit, Terrenus highlighted that Taproot's core benefits can basically be boiled down to 2 things: a privacy enhancement and a method to compress transactions, with both being related to the switch to a Schnorr signature scheme; and the deprecation of the ECDSA algorithm.

David Dayag, blockchain expert for Orbs, a public blockchain infrastructure platform, told Finder that Taproot's proposed improvements will allow for cheaper, more private transactions by using the MAST protocol and Schnorr algorithm, adding:

"These 2 would change transaction signing to consume less network space and computation effort, while making multi-signed transactions indistinguishable from other transactions, allowing for better privacy. This anticipated change would definitely bring Bitcoin closer to mass adoption and smart contracts DAPPs implementation."

Looking ahead

Taproot is one of the largest, most important updates to be implemented on the Bitcoin network since the introduction of SegWit back in 2017. And with the upgrade introducing smart contract functionality to BTC, it will be interesting to see how the flagship crypto diversifies and makes its way into the realm of decentralised finance (DeFi).

Between 2020 and 2021, the total value locked within this fast-growing sector rose from $11 billion to over $112 billion. It will be interesting to see how BTC fits into this niche market segment post its highly anticipated upgrade.

Interested in cryptocurrency? Learn more about the basics with our beginner's guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.


Disclosure: The author owns a range of cryptocurrencies at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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