On November 14, at block height 709,632, Taproot was finally activated. The Bitcoin community was excited about this event since it’s the most important protocol update in four years.

Four years after the last major evolution of the Bitcoin network, Taproot has just been activated at block height 709,632 on Sunday, November 14, 2021, at 5:15 UTC. This block which will remain an important milestone in the history of Bitcoin was mined by F2Pool.

The last major evolution of Bitcoin was in 2017 with the introduction of Segregated Witness.

Today, we’ll discuss what this new upgrade means for Bitcoin and the future of the crypto space.

An introduction for newbies: What is a soft fork?

As you may know, blockchain technology takes its name from its method to store data in a public ledger. Miners incorporate the information in small data containers called blocks, which are registered in a chain. Every block is linked through its unique hash to both the previous and the following block.

A fork occurs every time the blockchain splits into two different chains. However, there are two different types of forks:

A hard fork happens when the chain introduces changes to its code that are incompatible with the previous rules or versions. Because the new protocol rules oppose the old ones, nodes have to choose which chain they continue to support and mine, often leading to the creation of new chains or coins. An example of this is Bitcoin Cash.

In a soft fork, the changes introduced are an addition to the existent code. With the rules being compatible, no new chains are generated from soft forks, as nodes jump from the old chain to the new one until the migration is complete.

Bitcoin’s Taproot update is a soft fork of the Bitcoin chain. It introduces new upgrades that improve the existing protocol, for which miners have been signaling approval for almost a year.

Taproot improvements and Schnorr signatures

The Taproot update aims to improve the privacy, scalability, and security of the Bitcoin network and lay the groundwork for additional smart contract functionality that will enable further decentralized finance applications on Bitcoin.

Developers have formally specified the updates into three Bitcoin improvement proposals or BIPs: BIP-340, 341, and 342. I’ll explain the most relevant changes for non-technical audiences below. Let’s begin with Schnorr signatures.

Schnorr signatures

If you’ve read about Taproot, you’ve undoubtedly seen this term. Schnorr signatures are a cryptographic function that enables the combination of several public keys in a single, complex transaction signature.

Schnorr signature advantages for Bitcoin

Space and data storage requirements

The first advantage of using one Schnorr signature to replace several is freeing up space.

“An ECDSA signature is usually about 72 bytes in size for a single signature in a transaction. Schnorr signatures clock in at a maximum of 64 bytes per signature. That’s a roughly 12% savings in size compared to ECDSA for every Schnorr signature.”

—Shinobi for Bitcoin Magazine.

Requiring less data space for signatures is a win-win situation overall. Users pay lower fees to push their transactions through, and nodes also need fewer storage requirements to validate users’ Schnorr signatures.

Efficiency, speed, and scalability

Unlike ECDSA signatures, which have to be processed one by one, nodes can validate Schnorr signatures in batches.

Batch validation greatly improves speed and efficiency, reducing the consumption of CPU power it takes to process blocks.

Schnorr multi-signature properties are also worth mentioning. Instead of unraveling all public keys in a multi-signature transaction, Schnorr’s MuSig standard enables adding all public keys together and “generating” one public key that includes everyone’s data inputs, effectively making a joined transaction.

The benefits of being able to add Schnorr signatures together for batch processing are exponential. The more of them are validated at once, the more computational power is saved. This capacity, added to the multi-signature standard, leads to tremendous scalability potential.

Transaction privacy

Schnorr signatures’ MuSig standard also has significant advantages in preserving user privacy.

Outsider observers can only see the one public key generated by adding all user inputs together like a single signature script.

The same goes for layer-2 applications like Lightning Network channels. Schnorr multi-signatures are indistinguishable, as they show just like regular signatures. Nobody will be able to identify who nor how many people signed the transactions.

Thanks to this update, Bitcoin users who transact from MuSig wallets won’t reveal their public keys. The Schnorr signatures will blend all keys and generate a new, unidentifiable one.

The future of Bitcoin

Taproot is a highly anticipated upgrade that brings several benefits to the Bitcoin protocol. It is also a massive achievement for Bitcoin developers, who have been working on it for years.

The community has shown extreme enthusiasm for the upgrades in the user experience Taproot brings, primarily in privacy and scalability. Hopefully, the improvements will also catch outsiders’ eye, driving more adoption and usage of Bitcoin on a global scale.

With Taproot, the Bitcoin network is becoming better than ever. More efficient, with lower fees, better privacy, and expanded smart contract capabilities. In the short term, Taproot’s impacts won’t be huge, but in the long term, they are critical to the Bitcoin system.

Bitcoin continues to evolve at the pace it should

First of all, it is proof that the Bitcoin network is evolving, contrary to what some bad tongues frequently repeat to attack Bitcoin. If Bitcoin is evolving, it is doing so at its own pace to guarantee the security of the more than $1.2 trillion placed safely within its decentralized network. The slightest bug in the Bitcoin network would have dramatic consequences for the Bitcoin revolution.

We must move forward in a risk-free manner. So Bitcoin is moving at the pace it needs to move at.

As explained earlier in this newsletter, the major benefits of Taproot to the Bitcoin network and its users are threefold:

Smart contracts

The Schnorr signatures introduced with Taproot can be used to allow Bitcoin users to execute more complex smart contracts than Bitcoin currently allows. This is something essential as it appears that the need for smart contracts is growing in the cryptocurrency world.

For those who don’t know, smart contracts are digital agreements written within code and stored in a Blockchain. Smart contracts will have a key role to play in the coming years in decentralized finance (DeFi), dApps, and NFTs for example.

Although the smart contract capabilities introduced by Taproot will not allow for the same flexibility as within the Ethereum system, they will drastically narrow the gap. It would therefore not be surprising to see an increase in such applications based on the Bitcoin blockchain in the coming months.

Privacy

The Taproot update will increase privacy for certain types of transactions. Schnorr’s signatures will allow multi-signature transactions or transactions involving multiple addresses to appear as a simple and standard transaction to everyone. Multi-signature transactions are often used to develop smart contracts.

The fact that multi-signature transactions become indistinguishable from simple ones implies greater anonymity and privacy for the addresses involved in such transactions. Some see this as a risk, as they imagine that governments will see it as a threat. Indeed, more privacy and anonymity means potentially easier use of Bitcoin for illegal activities.

I think this is a simplistic view of things, and I don’t see this as a real risk. The US dollar system will remain the place of choice for those who want to launder money or practice tax evasion. Why? Simply because the banking system has always been conducive to this because of the corruption of the people who run it.

Cheaper transactions

The final important benefit of Taproot is that Schnorr’s signatures reduce the data needed for multi-signature transactions, which are more complicated to process than standard transactions. With fewer data to process and store, these transactions will become more efficient in terms of energy consumption, but also in terms of speed of execution.

Ultimately, with less expensive transactions to process, transaction fees will be reduced for these types of transactions. So this is something that will benefit users of the Bitcoin network in the future.

Final Thoughts

The activation of Taproot will not have an inordinate effect on the price of Bitcoin in the short term. On the other hand, it is an excellent signal that Bitcoin is continuing to move in the right direction for the future. Taproot is laying the foundation for the next phase of innovation in the Bitcoin protocol.

Many innovations will be developed from what Taproot enables for the Bitcoin system. The vast majority will be focused on smart contracts.