What significant changes has the first major upgrade of Bitcoin in four years brought?

This article is from the Plain Language Blockchain.

On June 13, the hash rate of mining pools supporting the Taproot upgrade across the Bitcoin network exceeded 90%, reaching the minimum requirement for locking the upgrade, which also means that the Taproot upgrade will officially activate this November.

Regarded as "the most ambitious upgrade" for Bitcoin in years, Taproot indeed represents extraordinary significance in the eyes of the industry, especially among Bitcoin enthusiasts, and is even considered "the most important proposal for upgrading the Bitcoin protocol so far."

However, compared to the Ethereum EIP 1559 proposal, which sparked significant debate in the industry, the Taproot upgrade has not generated much buzz, and many friends may not have heard much about it. So what exactly is the Taproot upgrade, and what changes will it bring to Bitcoin?

01 What is the Taproot Upgrade?

Taproot Activation

Bitcoin updates periodically (network soft forks forks arise from different ideas leading to various scaling solutions, and the inability to unify these solutions can lead to forks. See more), mainly introducing new features and information to Bitcoin through Bitcoin Improvement Proposals (BIPs).

The latest Taproot upgrade is a compilation "upgrade package" of three BIPs, which means the Taproot upgrade includes Schnorr Signatures (BIP 340), Taproot (BIP 341), and Tapscript (BIP 342):

1. BIP 340 --- Schnorr Signatures

The Schnorr signature scheme has long been on the wish list of many Bitcoin developers. Developed by German mathematician and cryptographer Claus Schnorr, it is known for its simplicity and efficiency in generating short signatures.

One of the main advantages of Schnorr signatures is that they can aggregate multiple keys and produce a unique signature in complex Bitcoin transactions. This means that signatures involving multiple parties can be "summed up" into a single Schnorr signature, hence the term aggregated signature.

In summary, Schnorr signatures primarily save space and reduce costs, and are hailed as the most significant technical update since Bitcoin's Segwit.

2. BIP 341 --- Taproot

Taproot is a solution built on Schnorr signatures, allowing for the inclusion of complex transaction conditions and funding usage details, and presenting all this information as a new funding usage condition (a new lock) to the outside world. This new usage condition and the unlocking method (new key) are supported by the linear characteristics of Schnorr.

This provides users with the ability to choose between complex arbitrary scripts and simply paying to a public key when spending (not receiving). Additionally, key aggregation makes all Taproot outputs appear similar.

As a result, since multi-signature outputs, single-signature outputs, and other complex smart contracts look the same on the blockchain, much blockchain analysis will become ineffective, thereby preserving privacy for all Taproot users.

3. BIP 342 --- Tapscript

BIP 342 adds and updates several opcodes, which are part of the machine language instructions that specify the operations to be executed. These new scripts help validate Taproot expenditures and Schnorr signatures, collectively referred to as Tapscript, maximizing the flexibility of P2TR expenditures and facilitating future upgrades.

It will enhance script functionality and privacy by only displaying the relevant parts of the contract when spending, helping to make smart contracts more efficient and private.

In short, the core of the Taproot upgrade lies in Schnorr signatures, and Taproot, based on the Schnorr signature algorithm, can bring a new combination and possibilities for Bitcoin in terms of performance, privacy, and even smart contracts.

02 Taproot Upgrade: The Most Important Proposal for Upgrading the Bitcoin Protocol

As is well known, Bitcoin completes exchanges by unlocking the unspent balance in UTXO through digital signatures. A simple breakdown of an exchange can be illustrated with the example of A transferring one Bitcoin to B, which can be divided into two steps: "unlocking" and "locking":

• Unlocking: A provides their private key to complete the unlocking, thereby proving that this one Bitcoin belongs to them and can be used;
• Locking: A locks this one Bitcoin with B's public key and then transfers it to B, so that only B can unlock it using their own private key;

In other words, Bitcoin needs to use a public key to lock and a private key to unlock, thus enabling the transfer of cryptocurrency. The generation of public and private keys is done through a digital signature algorithm, and the aforementioned Schnorr signature is the new signature algorithm.

Its most prominent feature is the ability to aggregate multiple public keys or multiple private key signatures into a new public key or a new signature, which can be simply understood as turning multiple locks that need to be opened simultaneously into one lock, and a string of keys used for unlocking into a single key.

From this perspective, the Taproot "upgrade package," regarded as "the most important proposal for upgrading the Bitcoin protocol," could bring multifaceted changes to Bitcoin.

• Performance ------ Similar to Rollup's Scaling Effect

First, the improvement in performance is the most direct. Because the Taproot based on Schnorr signatures can include complex exchange conditions and funding usage details, presenting all this information as a new funding usage condition (a new aggregated signature lock) to the outside world.

This reduces the amount of data transmitted and stored on the blockchain, allowing for more transactions to be included in a single block, thereby lowering costs and achieving a scaling effect (in fact, I think it resembles Rollup on Ethereum).

• Privacy ------ Enhancing Privacy Options in the Bitcoin Network

Secondly, from a privacy perspective, it will also receive the greatest boost. Although Schnorr signatures do not make individual Bitcoin addresses on public blockchains more anonymous, they make simple exchanges difficult to distinguish from those more complex exchanges composed of multiple signatures.

At the same time, this allows users to mask complex smart contracts as ordinary Bitcoin exchanges, providing greater privacy for users.

03 Bitcoin's "Difficult Payment" Journey

In July, the Ethereum London upgrade is set to arrive, which not only includes the eagerly awaited EIP-1559 proposal but also a total of five proposals including EIP-3198, EIP-3529, EIP-3541, and EIP-3554.

Unlike the boundless innovation continuously emerging in the Ethereum ecosystem, Bitcoin's upgrades have always been relatively quiet, and many friends may even feel that Bitcoin development might be stagnating.

Especially since 2020, it seems that everyone has gradually accepted Bitcoin's positioning as "digital gold," forgetting the debates that once sparked in the industry, including the hard fork (hard fork) of BCH due to Bitcoin's scalability issues at Block 478558 (around 13:16 UTC on August 1, 2017), which was a continuation of Bitcoin as peer-to-peer digital cash. With upgraded consensus rules allowing for growth and scaling, the default block size was adjusted to 8M, claiming to be a better Bitcoin, the best money in the world, providing users and merchants with a cheaper, faster, and safer transfer experience. See more about the "payment attributes" behind forks, and it seems that upgrades in technical applications are not that important anymore.

Just like the "Lightning Network," which is dedicated to small Bitcoin payments, after nearly three and a half years of effort, the amount of Bitcoin locked has finally surpassed 1,500 coins, a 42% increase compared to the beginning of 2021, setting a historical high, which seems to be a remarkable achievement.

However, at the same time, in the past year, the total issuance of Bitcoin pegged tokens on the Ethereum chain has almost started from zero, surpassing 252,000 coins, while the years of hard work promoting Bitcoin's Lightning Network have not even matched the fractional amount of "ERC20 Bitcoin."

The Taproot upgrade can be seen as a timely rain, strengthening Bitcoin's usability in payment performance and privacy, including the Lightning Network. If Taproot is adopted, it can improve the privacy of the Lightning Network by making channels appear like regular Bitcoin exchanges, perhaps restoring Bitcoin's status as "global currency," giving it an advantage in the competition with its positioning as "digital gold."

However, whether "digital gold" becomes more popular or "global currency" is the original intention, perhaps Bitcoin has already become a different species from all other cryptocurrencies, including Ethereum.