Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Bitcoin’s Taproot Upgrade – What you need to know
ChainAnalysis Blog | Nov 15, 2021
On November 14th, block height 709,632, Bitcoin’s Taproot upgrade was activated. The update brings with it improvements to the flexibility, security, and efficiency of bitcoin transactions. And as Bitcoin’s first protocol upgrade in over four years, it’s a major milestone in the development of the network.
See: First US Bitcoin ETF Already in Danger of Breaching Futures Contracts Limit
The Taproot upgrade is backwards compatible with older versions of bitcoin and does not create a separate, parallel blockchain, as was the case with Bitcoin and Bitcoin Cash. Adoption of taproot is expected to grow slowly over a period of years.
Three interconnected upgrades
The Taproot upgrade is actually an umbrella term referring to three interconnected Bitcoin Improvement Proposals (BIPs) set to activate simultaneously:
- BIP 340, or Schnorr. This proposal introduces Schnorr signatures, a digital signature scheme that is faster, more secure, and less data-intensive than the cryptographic method currently in use (Elliptic Curve Digital Signature Algorithm, or ECDSA).
- BIP 341, or Taproot. This proposal defines Pay-to-Taproot (P2TR), a new way to send bitcoin that enhances privacy and flexibility for users. It also implements Merklized Alternative Script Trees (MAST), which compress complex Bitcoin transactions into a single hash. This reduces transaction fees, minimizes memory usage, and improves Bitcoin’s scalability.
- BIP 342, or Tapscript. This proposal defines Tapscript, an update to Bitcoin’s original scripting language that enables P2TR transactions, leverages Schnorr signatures’ improved efficiency, and allows for more flexible upgrades going forward.
See: Cardano founder Charles Hoskinson discusses ‘bitcoin maximalism’ and ‘real-fi’
The Taproot upgrade will improve Bitcoin in a number of ways, such as:
- Lower fees: Since the data size of complex transactions will be reduced, transaction fees will decline proportionally.
- Improved lightning network efficiency: Taproot will make transactions on the Lightning Network cheaper, more flexible and more private.
- Enhanced smart contract functionality: With Taproot, Bitcoin will be able to host smart contracts with any number of signatories while retaining the data size of a single-signature transaction. This lays the technical foundation for DeFi on the Bitcoin network.
- And many others
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