On November 14, the Bitcoin network underwent one of the largest updates in its history – a significant step for the future of the network, which was met with a broad consensus from the community.
While according to Coinmarketrate.com Other blockchain networks, such as Ethereum and Polkadot, are frequently updated to experiment with the latest innovations in cryptography and blockchain research, changes to the Bitcoin protocol require a notoriously long and difficult process to obtain consensus. The last Bitcoin update was SegWit four years ago, which actualizes the importance of Taproot.
Why did the network need an update?
Until now, the main benefit of Bitcoin has been that it has been a peer-to-peer, decentralized payment system and a store of value. Relatively speaking, this is a rather limited set of functions: the latest generation of blockchains is equipped with the ability to work with smart contracts, which is becoming increasingly important due to the rapid development of dApps and DeFi. Since this has already become an industry standard, Bitcoin needed to be updated to keep up with an emerging market that is constantly demanding more.
The Bitcoin network has also faced quite serious scalability issues. Simply put, it could not process large volumes of transactions due to the peculiarities of the network. Let’s look into this a little bit.
When users send or receive payments online, each piece of Bitcoin comes with its own script. These scripts become publicly available data on the Bitcoin network, greatly cluttering it up, as well as showing the world confidential information about your funds. If we consider that this process occurs with every user of the Bitcoin network, it is easy to understand how the scaling problem arose.
So what is Taproot?
Updating Taproot means increasing the level of privacy, security and scalability of the network, and also opens up new opportunities for future developments.
It significantly reduces the amount of transaction data storage on the Bitcoin network: it allows you to use more complex smart contracts, and also makes scaling more achievable. Moreover, it increases the confidentiality of transactions by showing them in a standard format on a public blockchain.
Lightning Network users and wallets with multiple signatures are examples of contracts that will immediately benefit from increased privacy and cheaper transactions.
Key components of the update
Despite its name, Taproot is not a simple one-stop solution to all Bitcoin problems. Rather, the update consists of several components that will work in unison to raise the VTS network to a new height, which is a huge event for the entire blockchain community.
Let’s look at each of the most important components of Taproot to get the full picture.
To begin with, Schnorr Signatures is a new form of transaction signatures in the blockchain, which provides increased security, lower fees and flexible multisig. When a block receives a transaction, it is always accompanied by a signature. Signatures ensure that transactions cannot be altered in any way.
The unique property of Schnorr signatures allows several parties to jointly create one signature that is not inferior to the signature of each of the participating parties. So instead of three signatures: “Alice signed this, Bob signed that, and while Charlie figured out what to sign, everyone stopped wanting to make a transaction,” Schnorr’s signature may read: “Alice, Bob and Charlie signed this.” And that’s it! This property is called signature aggregation, and provides a better, more private and efficient way to store coins together (wallets with multiple signatures).
Schnorr signatures also have a unique feature that speeds up the entire Bitcoin network, adding scalability to its list of advantages. While ECDSA signatures should be checked one at a time, Schnorr signatures provide a more efficient process in which many signatures are checked at once, which requires significantly less calculations than when checking each of them individually.
One fun fact: Schnorr signatures could (and probably should have) been used in the Bitcoin protocol from the very beginning. But at the time of the network’s creation, Schnorr’s signatures were still patented, so a modern signature scheme (ECDSA) was used instead.
MAST (Merklized Alternative Script Tree)
The Taproot update integrates another script enhancement that was proposed back in 2013, but never entered the Bitcoin protocol: Merklized Alternative Script Trees or MAST.
As mentioned above, every amount of Bitcoin that can be spent comes with a script defining what conditions must be met to get permission to spend these coins. In the simplest case, the condition looks like this (let’s turn to the long-suffering characters): “Alice owns these coins,” that is, such statements that can be confirmed by cryptographic signatures.
But more complex conditions are also possible, for example: “Two of Alice, Bob and Charlie must sign” (multi-signature 2 of 3), or “Bob signs, but 2 weeks must pass first” (timelock), or “certain secret data with hash H must be disclosed” (hashlock).
More complex contracts can be made by combining several such simple conditions, for example, the Lightning network itself uses contracts that combine 2-of-2 multi-signatures, timelock and hashlock.
The problem with using contracts with a large number of alternative spending conditions is that the size of the script continues to grow when more such conditions are added. In fact, even if only one of these conditions is used, the entire scenario must be disclosed. Such a waste!
But then MAST comes to the rescue. Using a well-known cryptographic construction called the Merkle tree, it is possible to encode all possible spending conditions in one short summary (hash, usually 32 bytes long) in such a way that only one of these conditions can be disclosed.
This provides huge savings in terms of the amount of space used by complex contracts, which can now have dozens or hundreds of spending conditions without much additional cost.
Moreover, only the parties involved in the contract will know about all possible conditions for spending funds: an external observer knows only about one condition for spending funds that was actually used, which at the same time is a big win for confidentiality.
Finally, the Taproot update introduces a new type of transaction scripts called Pay-2-Taproot. This allows you to combine the Schnorr signature and MAST in a single transaction. Previous types of transactions allowed an outside observer to easily distinguish whether some Bitcoins were blocked using a single key, or using a more complex script.
Using the properties of Schnorr signatures, P2TR addresses allow you to combine signatures and scripts together, hiding the MAST scripts inside the public key. Thus, the same coins can be spent either using a simple signature corresponding to this public key (key path spend), or using one of the scripts in MAST (if any).
No one will ever know about the existence of scripts if they are not used when spending coins!
Now is an exciting time for Bitcoin, and the Taproot update is of great importance for the community and for the crypto industry as a whole. Although this update will not allow NFT or other types of tokens to flourish in the Bitcoin ecosystem (this was not its goal initially), it will allow better use of Bitcoin’s core value propositions: store value and spend it.
Currently, discussions are underway about expanding the capabilities of the Bitcoin cryptocurrency, which, in turn, may bring its holders more standard cases of using DeFi.
This will increase its overall appeal to thousands of developers whose mission is to pave the way for continuous innovation, first-class security and faster data processing.