Taproot is a Bitcoin soft fork that will enhance privacy and script execution. It is also connected with the Schnorr soft fork, which will improve scalability, transaction speed and encode multiple keys into one.
This fall will mark an important milestone in Bitcoin development, as the activation of Taproot on the main Bitcoin network presumably takes place in November. Taproot is a soft fork (meaning it doesn’t involve splitting the blockchain), which became the talk of the community over the spring. More than 90% of BTC miners have already confirmed their support for the Taproot upgrade, which is currently being tried on the test network.
The upgrade to Taproot should improve the privacy and scalability of Bitcoin through the use of Schnorr signatures. As you may recall, Schnorr signatures allow you to create a multisignature (from multiple senders), which looks like a typical transaction to an outside observer. This signature is smaller, so miners can pack more transactions into one block. Using Taproot will allow the Schnorr multisignature method to be applied to almost all types of transactions on the BTC network. That includes, for instance, closing a channel in the Lightning Network, which will significantly complicate tracking payments in the Bitcoin blockchain.
One of the issues with Bitcoin today is the poor implementation of a complex transaction scheme. For example, when you have two senders at once, each having to add their signature, anyone who will then analyze the blockchain can easily distinguish such an operation from a regular transaction and identify all its participants. After the Taproot activation, though, Schnorr signatures will make it possible to create a multisignature that includes data on several senders but looks like a regular transaction to an outside observer, so its details remain confidential. The new Schnorr signatures will replace the current ECDSA (Elliptic Curve Digital Security Algorithm).
Another crucial point is that Taproot opens up opportunities for smart contracts on the BTC network. This is an essential element for today’s decentralized web as business users get the tools for broader use of Bitcoin. As it stands, smart contracts can be created on Bitcoin Core and the Lightning Network, but let’s just say those lag behind most modern blockchains in terms of their capabilities. Launching Taproot will make them “lighter”, which means that the subsequent smart contract development can make the network more competitive in the market currently dominated by Ethereum.
Taproot could also go down in the history of the first cryptocurrency as one of the most “peaceful” network upgrades, having caused virtually no controversy and squabbles in the Bitcoin community. Voting on it started at the beginning of May this year. 90% of miners had to issue blocks with a unique label during any two-week period of increasing difficulty. The mark was reached fairly quickly: the community supported the initiative, although they argued over the way to download the upgrade.
After consensus was reached, the upgrade was frozen for five months. During this time, miners and nodes will have to update the main Bitcoin Core client to version 0.21.1., which will contain the Taproot software. Then, around November 2021, block #709632 with the soft fork is going to be released, and Taproot will run full force on the Bitcoin network.
Ordinary users won’t even notice, but professional players in the cryptocurrency market will get access to a wider range of services. By itself, a sharp increase in Bitcoin’s privacy surely won’t lead to a redistribution of the crypto market. But the emergence of the smart contract mechanism allows BTC to enter the DeFi segment, which may cause an actual revolution in centralized finance. There, such a heavyweight as BTC is capable of radically changing the established rules of the game.
Don’t forget that the previous equally large-scale Bitcoin soft fork was the activation of SegWit support in August 2017. Then, the update led, among other things, to the division of the blockchain – this is how the Bitcoin Cash cryptocurrency was born. But that was a deliberate action by developers and miners opposed to SegWit. Launching Taproot will undoubtedly dispense with the creation of a new Bitcoin-based cryptocurrency.