The Taproot Upgrade: What Is It, and Why Does it Matter?

TL;DR:

Taproot is a soft fork and the most anticipated Bitcoin upgrade since SegWit
Taproot will bring a new signature scheme called Schnorr signatures to the Bitcoin network
Using Schnorr signatures opens up more possibilities and benefits for efficiency, security, and smart contract-compatibility than the current signature scheme, ECDSA.

Read on for a rundown of what taproot is and why it matters.

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What is Taproot and why is it so important?

Taproot is an upgrade that will come into effect in the Bitcoin network in November after a vast majority of miners supported the upgrade, and many believe that it will be a revolutionary time in cryptocurrency because of the benefits and possibilities the upgrade brings. Because of Taproot, there will be:

More privacy: Before Taproot, anyone could detect transactions that had more complex features, like timelock releases and multiple signatures, which require multiple transactions. Now, if transactions utilize these complex features, they’ll look like only one transaction. This means there will be more privacy.
More potential for smart contracts: Many also believe that Taproot will be instrumental for smart contracts. A smart contract has the terms of agreement between a buyer and seller written in computer code that automatically executes the terms. The code and therefore the agreement laid out in the contract remains and is replicated in the blockchain forever, lending the agreement security and immutability. And of course, no central authority is needed for the smart contract to operate -- only the code.
Other overall benefits: Because of the addition of Schnorr signatures, Taproot will increase efficiency in transactions, reduce the amount of data to be transferred and stored on blockchain, increase the TPS rate (meaning, it will allow for more transactions per one block), and reduce transaction costs.

Let’s continue to discuss the specific technology behind the upgrade.

Hard Forks vs. Soft Forks

A bitcoin fork essentially is a change in the bitcoin network protocol that occurs when many miners decide to implement new rules for the network. Essentially, it is a change in the bitcoin network protocol. There are two types of forks: hard forks and soft forks. Taproot is a soft fork.

Hard forks are drastic changes to the bitcoin protocol, but soft forks are less severe changes.
Soft forks are backward compatible: nodes can continue to operate by viewing transactions or mining new blocks since soft forks do not force all nodes to immediately change to the new rules. Hard forks are not backward compatible, meaning that any nodes that use the old software won’t be able to communicate with the network: they need to upgrade to the new software if they want to communicate with the network.

The Signature and Key Pair System of Bitcoin

Taproot will bring Schnorr signatures to the Bitcoin network. Bitcoin revolves around the use of signatures. Digital signatures are essentially digital proof-of-ownership mechanisms that are backed by the mathematical processes that underlie Bitcoin, and they are used to prove that you have knowledge of a particular number, called a private key.

In real life, just like you use your hand to create a signature to verify that it’s you who agrees to the terms and conditions of a contract, the private key is used to create a digital signature that proves that the owner of the key approved the transaction. In essence, a private key is a randomly generated large, unique number. So, the digital signature is mathematical proof of possession of the private key -- and you don’t have to reveal to the world what the actual key is. With the public key, someone can verify that the signature was created by you, who has the private key that corresponds to the public key -- and this process never reveals the private key.

Until Taproot’s installation of Schnorr signatures, the Bitcoin network will continue using the “Elliptic Curve Digital Signature Algorithm” (ECDSA) for digital signatures. At the time Satoshi Nakamoto, the founder of Bitcoin, was coding Bitcoin, he used ECDSA because it was more standard, and no one was able to use Schnorr Signatures because it was patented until 2008.

Schnorr Signatures vs ECDSA (subheading of “The Signature System of Bitcoin”)

With ECDSA, a public key is generated by multiplying the private key by a public elliptic curve point. With Schnorr signatures, multiple keys are combined inside a complex Bitcoin transaction, like a smart contract, to create a new public key. This then creates a single unique Schnorr signature that is only possible for that specific combination of keys. This feature of putting public keys into an aggregated key is called key aggregation, and Schnorr signatures’ linearity feature–which ECDSA does not have–allows this.

Schnorr signatures use the same public-private key pairs, but they are non-malleable, linear, and more elegant and simple than ECDSA. Schnorr signatures will make multi-signature transactions unreadable, meaning that these transactions will be indistinguishable from simple, regular BTC transactions.

Additionally, taproot will stop signatures from being malleable. Malleability is the process of changing the digital signature used to create a transaction to change the unique identifier of the transaction; the malleable nature of ECDSA means that a third party can compute another signature for a public key of a transaction and hash even if they don’t have access to the private key, which introduces security vulnerabilities. But now, with taproot, signatures will no longer be malleable, which alleviates privacy and security concerns for many.

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In short, the Taproot upgrade, which will add Schnorr signatures to the Bitcoin network, will bring a plethora of benefits and possibilities when it is implemented in November.

Want more info? Check out our blogposts that we’ve written about other topics pertaining to bitcoin.

Keep Stacking,
The Lolli Team