Bitcoin’s Taproot Upgrade – What You Need to Know

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The Bitcoin Taproot upgrade is set to activate on November 16, 2021. 

The upgrade will activate three major changes in Bitcoin’s base-level protocol.

Schnorr signatures, MAST scripts, and a new scripting language known as ‘Tapscript’ will collectively improve Bitcoin’s privacy, security, scalability, and support for basic smart contract functionality.

Taproot Technical Improvements 

By enabling the use of Schnorr signatures and MAST scripts to sign and process transactions, the Bitcoin Core developers have increased bitcoin’s functionality beyond that of simple coin transfers. Specifically, Schnorr signatures will improve Bitcoin’s ability to perform multi-signature (MuSig) transactions, while MAST scripts (Merklized Alternative Script Trees) will allow Bitcoin to compress the size of its scripting paths by revealing to the blockchain only the part of the contract that was met.

MAST Scripts explained

Schnorr signatures and MAST scripts are both complex, and they take a bit of time to understand. The most important thing to know is that both these functionalities involve decreasing on-chain data transfer and improving Bitcoin’s development opportunities. Each will serve to improve Bitcoin’s efficiency without relinquishing any of Bitcoin’s benefits, such as decentralization or privacy. 

What Does Taproot Improve?

The current rendition of Bitcoin is plagued by two fundamental problems: 1) lack of scalability, and 2) lack of privacy. Schnorr signatures, specifically, fix both these issues. This is because Schnorr signatures allow for ‘signature aggregation’, which minimizes complex multi-signature transactions down to the size of a single transaction. The opportunities that derive from this simple functionality are actually quite expansive. Furthermore, when you pair this with the added abilities that come from MAST Scripts, then you can see a myriad of new ways to efficiently execute complex Bitcoin transactions. 

What Will Be Built On Bitcoin?

Lightning Network The Taproot upgrade will make the Lightning network more private and lightweight. Basic payment routing and blockchain settlement will become significantly cheaper, which then allows for more scalability and development on Lightning. Currently, one of the most promising Lightning network companies is Zap, which created the Strike API. Strike is a simple Lightning network payments interface that uses Bitcoin as a conversion layer to support a global network of fiat payments.

Sidechains – It is likely that the technical improvements within the Taproot upgrade will create a new market for sidechains on Bitcoin. Schnorr signatures will make it cheaper and easier for Bitcoin users to transfer their coins off the Bitcoin base-chain and onto sidechains. Liquid Network, created by the company Blockstream, is currently one of the most interesting Bitcoin sidechains. The Liquid Network sidechain is directly pegged to Bitcoin, in a 1:1 relationship between BTC and L-BTC. The most influential features within Liquid are its support for asset issuance and confidential transactions. 

Discreet Log ContractsDLCs provide a way to implement outside data within Bitcoin scripts. DLCs use an oracle or set of oracles to input data, which is then used to automate a predefined contract. Put another way, discreet log contracts enable developers to make bitcoin payments based on an oracle’s signature. 

Unlike Lightning network and sidechain transactions, DLCs can be run directly on Bitcoin’s base-chain. To the eyes of the Bitcoin blockchain, a DLC transaction appears identical to a multi-signature transaction. While discreet log contracts are not new, the Taproot upgrade will make these transactions significantly cheaper and more efficient. 

Analysis:

The Taproot upgrade will firstly improve Bitcoin’s all-around functionality as a storage of value and medium of exchange, then secondly improve Bitcoin’s support for complex transactions. Bitcoin will not become synonymous to Ethereum after Taproot, as the upgrade does not allow for Ethereum’s level of smart contract functionality. Rather, Bitcoin will increase support for many already possible transactions (such as MuSig and DLC transactions) as well as gain support for MAST scripts and further scale the Lightning network. Simply put, after the Taproot upgrade it will be possible to build simple applications on Bitcoin’s base-layer blockchain, and more efficient to run complex applications on the Lightning Network and Bitcoin sidechains. 

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