Author: Babbit

It is reported that the Taproot upgrade of the Bitcoin network will be implemented on November 14 at 2 PM Beijing time (when the block height reaches 709,632). This historic upgrade will enhance Bitcoin's privacy, scalability, and the flexibility of smart contracts.

So what exactly is Taproot? Let's quickly review its development history:

Taproot is the first Bitcoin soft fork upgrade since the implementation of Segregated Witness (SegWit) in 2017. This soft fork includes three BIPs that work together to enhance Bitcoin's important attributes and pave the way for significant innovations:

• Schnorr Signatures
• Taproot
• Tapscript

Detailed Explanation of the Three Major BIPs of the Taproot Upgrade

BIP340 (Schnorr Signatures) introduces a more secure, lightweight, and flexible cryptographic signature that supports "key aggregation," a technique that ensures single-signature transactions, multi-signature transactions, and complex smart contracts are indistinguishable on the blockchain.

The key aggregation feature of Schnorr allows the parties involved in multi-signature transactions to collaboratively combine their public keys and generate a signature that is valid for the sum of their public keys.

This saves block space, improves privacy, and enables faster transaction verification.

BIP341 (Taproot) specifies the rules for a new Pay-to-Taproot (P2TR) output type, upgrading SegWit v0 to v1 to accept Schnorr signatures.

The purpose of this BIP is to enhance the privacy, efficiency, and flexibility of Bitcoin's scripting capabilities without compromising security.

BIP-Taproot utilizes Schnorr signatures to include more complex transaction types, making them indistinguishable from single-signature transactions on the blockchain.

This includes opening/closing Lightning Network channels, atomic swaps, and other complex smart contract protocols.

More importantly, BIP-Taproot implements Merkleized Abstract Syntax Trees (MAST), a privacy solution that uses Merkle trees to submit only the execution conditions of transactions to the blockchain, rather than the complete details of all other possible outcomes.

By only revealing the details of executed transactions, Taproot records less data on the blockchain, providing Bitcoin users with greater privacy and scalability.

BIP342 (Tapscript) updates the script encoding language used for writing BTC transaction parameters to provide users who choose to upgrade with Schnorr and Taproot technology. Additionally, Tapscript makes future opcode updates for Bitcoin easier to implement.

Many believe that the implementation of Taproot also lays the technical foundation for DeFi on Bitcoin.

After activation, Bitcoin can support large-scale smart contracts with tens of thousands of signatures while hiding all participants and maintaining the size of single-signature transactions.

What impact will the completion of the Taproot upgrade have on Bitcoin?

However, since most wallet service providers will continue to use the ECDSA signature scheme after Schnorr signatures are activated, the magic of Taproot may not be immediately apparent. Furthermore, Bitcoin blocks will continue to contain both Schnorr signatures and ECDSA signatures, which limits the benefits of batch verification in the short term.

At the appropriate time, the crypto community will widely adopt this technology so that most transactions will be conducted through Taproot (even if Bitcoin users are unaware). Nevertheless, full adoption will not happen overnight, and some individual users are more likely to adopt Taproot before enterprises do.

On the other hand, as the preparations for the Taproot upgrade have been underway for many years, some market participants believe that the positive impact of Taproot on Bitcoin has already been reflected in its price.

Skeptics may point out that Bitcoin's market capitalization has grown nearly tenfold since March 2020, partly due to the Taproot upgrade, which has been on the industry's radar for a long time. Others may argue that the impact of Taproot will only be reflected in Bitcoin's price after activation, as evidenced by the 50% surge in Bitcoin's market capitalization within a week after the activation of SegWit.

Setting aside price impacts, this technological upgrade makes the Bitcoin network more attractive for building DeFi protocols, which may attract incremental demand for Bitcoin.

Specifically, key aggregation allows Bitcoin to compete with higher throughput blockchains (such as Ethereum). Some speculate that Taproot enables Bitcoin sidechain networks (such as Sovryn, Thorchain, and Portal) to create large-scale multi-signature vaults, locking Bitcoin for sidechain use while maintaining the same cost as single-signature transactions. Before the implementation of Taproot, the high costs associated with large numbers of signatures were a significant deterrent.

Due to the prohibitively high costs of large multi-signature smart contracts with hundreds or even thousands of signers, interest in Bitcoin from DeFi protocols has been low. According to DeFi Prime data, DeFi projects on the Ethereum platform account for 64%, while Bitcoin's DeFi protocols only account for about 7.5% (in terms of quantity).

Additionally, SegWit transactions and Lightning Network channels will become more common, as there will be a significantly better option available. However, after the activation of Taproot, it may be difficult to measure this growth, as creating and closing Taproot-compatible LN channels will appear like standard transactions.

Once all 21 million Bitcoins are in circulation, Taproot may also create a robust fee market for miners. This theory assumes that if users have a substantial need for privacy, they may wish to passively participate in CoinJoin transactions, where their wallet balances are combined into a single transaction among multiple senders. If this demand is significant, even after the last Bitcoin enters circulation, the increase in on-chain fees may incentivize miners to continue working.

Regardless, Taproot can enhance Bitcoin's viability as a store of value and medium of exchange.

Acknowledgments to Contributors

Finally, sincere thanks to the community members who made significant contributions to the Bitcoin Taproot upgrade. (The list is sourced from bitcoinops.org)

Bitcoin Development Mailing List Discussion:

Adam Back, Andrea Barontini, Andreas Schildbach, Andrew Chow, Andrew Poelstra, Anthony Towns, Antoine Riard, Ariel Lorenzo-Luaces, Aymeric Vitte, Ben Carman, Ben Woosley, Billy Tetrud, BitcoinMechanic, Bryan Bishop, Carlo Spiller, Chris Belcher, Christopher Allen, Clark Moody, Claus Ehrenberg, Craig Raw, Damian Mee, Daniel Edgecumbe, David A. Harding, DA Williamson, Elichai Turkel, Emil Pfeffer, Eoin McQuinn, Eric Voskuil, Erik Aronesty, Felipe Micaroni Lalli, Giacomo Caironi, Gregory Maxwell, Greg Sanders, Jay Berg, Jeremy Rubin, John Newbery, Johnson Lau, Jonas Nick, Karl-Johan Alm, Keagan McClelland, Lloyd Fournier, Luke Dashjr, Luke Kenneth Casson Leighton, Mark Friedenbach, Martin Schwarz, Matt Corallo, Matt Hill, Michael Folkson, Natanael, Oleg Andreev, Pavol Rusnak, Pieter Wuille, Prayank, R E Broadley, Riccardo Casatta, Robert Spigler, Ruben Somsen, Russell O'Connor, Rusty Russell, Ryan Grant, Salvatore Ingala, Samson Mow, Sjors Provoost, Steve Lee, Tamas Blummer, Thomas Hartman, Tim Ruffing, Vincent Truong, vjudeu, yancy, yanmaani---and ZmnSCPxj.

Taproot BIP Review:

achow101, afk11, aj, alec, amiti, andrewtoth, andytoshi, ariard, arik, b10c, belcher, bjarnem, BlueMatt, bsm1175321, cdecker, chm-diederichs, ChrisStewart5, cle1408, CubicEarth, Day, ddustin, devrandom, digijames, dr-orlovsky, dustinwinski, elichai2, evoskuil, fanquake, felixweis, fjahr, ghost43, ghosthell, gmaxwell, harding, hebasto, instagibbs, jeremyrubin, jnewbery, jonatack, justinmoon, kabaum, kanzure, luke-jr, maaku, mattleon, michaelfolkson, midnight, mol, Moller40, moneyball, murch, nickler, nothingmuch, orfeas, pinheadmz, pizzafrank13, potatoeface, pyskell, pyskl, queip, r251d, raj149, realorrandom, robert_spigler, roconnor, sanket1729, schmidty, sipa, soju, sosthene, stortz, taky, t-bast, theStack, Tibo, waxwing, xoyi-and ZmnSCPxj.

GitHub Pull Requests:

Andrew Chow (achow101), Anthony Towns (ajtowns), Antoine Riard (ariard), Ben Carman (benthecarman), Ben Woosley (Empact), Bram (brmdbr), Cory Fields (theuni), Dmitry Petukhov (dgpv), Elichai Turkel (elichai), Fabian Jahr (fjahr), Andreas Flack (flack), Gregory Maxwell (gmaxwell), Gregory Sanders (instagibbs), James O'Beirne (jamesob), Janus Troelsen (ysangkok), Jeremy Rubin (JeremyRubin), João Barbosa (promag), John Newbery (jnewbery), Jon Atack (jonatack), Jonathan Underwood (junderw), Kalle Alm (kallewoof), Kanon (decryp2kanon), kiminuo, Luke Dashjr (luke-jr), Marco Falke (MarcoFalke), Martin Habovštiak (Kixunil), Matthew Zipkin (pinheadmz), Max Hillebrand (MaxHillebrand), Michael Folkson (michaelfolkson), Michael Ford (fanquake), Adam Ficsor (nopara73), Pieter Wuille (sipa), Sjors Provoost (Sjors), Steve Huguenin-Elie (StEvUgnIn), Tim Ruffing (real-or-random), and Yan Pritzker (skwp).

Taproot Activation Discussion:

6102bitcoin, AaronvanW, achow101, aj, alec, AlexandreChery, AlistairMann, amiti, andrewtoth, andytoshi, AnthonyRonning, ariel25, arturogoosnargh, AsILayHodling, averagepleb, bcman, belcher, benthecarman, Billy, bitcoinaire, bitentrepreneur, bitsharp, bjarnem, blk014, BlueMatt, bobazY, brg444, btcactivator, btcbb, cato, catwith1hat, cguida, CodeShark_, conman, copumpkin, Crash78, criley, CriptoLuis, CubicEarth, darbsllim, darosior, Day, DeanGuss, DeanWeen, debit, Decentralizedb, devrandom, DigDug, dome, drorlovsky, duringo, dustinwinski, eeb77f71f26eee, eidnrf, elector, elichai2, Emcy, emzy, entropy5000, eoin, epson121, erijon, eris, evankaloudis, faketoshi, fanquake, fedorafan, felixweis, fiachdubh, fjahr, friendlyarthrop, GeraldineG, gevs, gg34, ghost43, ghosthell, giaki3003, gloved, gmaxwell, graeme1, GreenmanPGI, gr-g, GVac, gwillen, gwj, gz12, gz77, h4shcash, harding, hebasto, hiro8, Hotmetal, hsjoberg, huesal, instagibbs, Ironhelix, IT4Crypto, ja, jaenu, JanB, jeremyrubin, jimmy53, jnewbery, jonatack, jonny100051, jtimon, kallewoof, kanon, kanzure, Kappa, keblek, ksedgwic, landeau, lucasmoten, luke-jr, maaku, Majes, maybehuman, mblackmblack, mcm-mike, Memesan, michaelfolkson, midnight, MikeMarzig, mips, mol, molz, moneyball, mrb07r0, MrHodl, murch, naribia, newNickName, nickler, nikitis, NoDeal, norisgOG, nothingmuch, occupier, OPNOP, OtahMachi, p0x, pinheadmz, PinkElephant, pox, prayank, prepaid, proofofkeags, provoostenator, prusnak, qubenix, queip, r251d, rabidus, Raincloud, raj, RamiDz94, realorrandom, rgrant, riclas, roasbeef, robertspigler, rocketfuel, roconnor, rovdi, rubikputer, RusAlex, rusty, sanket1729, satosaurian, schmidty, sdaftuar, setpill, shesek, shinobiusmonk, snash779, solairis, somethinsomethin, stortz, sturles, sugarpuff, taPrOOteD, TechMiX, TheDiktator, thomasb06, tiagocs, tomados, tonysanak, TristanLamonica, UltrA1, V1Technology, vanity, viaj3ro, Victorsueca, virtu, walletscrutiny, wangchun, warren, waxwing, Whatisthis, whuha, willclark, WilliamSantiago, windsok, wumpus, xxxxbtcking, yanmaani, yevaud, ygrtiugf, Yoghurt11411, zmnscpxj, and zndtoshi.

Finally, we would also like to thank all the miners who have contributed to executing the Taproot rules since block 681,408.

Related Information:

1. https://kraken.docsend.com/view/9e9y7may8526z934

2. https://bitcoinops.org/en/newsletters/2021/11/10/