After more than three years of discussion and planning, the Bitcoin Taproot upgrade is going live in November 2021. Bitcoin’s first major upgrade since 2017, Taproot promises numerous benefits to both users and miners, which could cause Bitcoin’s fundamental value to climb.
What is Taproot?
In a nutshell, Taproot is a set of three upgrades to the Bitcoin software, formally known as Bitcoin Improvement Protocols. These changes will become active with the mining of Block 709,632 in mid-November, making it possible to process transactions more quickly and securely, while using less blockchain space and electricity.
To better appreciate how Taproot will make Bitcoin better, it helps to understand a key concept about transactions.
How Bitcoin Transactions Work
When sending or receiving bitcoins, the blockchain doesn’t record a new total balance for an address the way a bank would. Instead, it works more like a physical wallet for cash. For example, if you want to buy something that costs $30, of course you don’t have a thirty-dollar bill, but you might have three tens.
Similarly, your Bitcoin account keeps a record of all your “bills,” known as unspent transaction outputs (UTXOs), which you received from earlier transactions and haven’t spent yet. Your wallet software adds these up and displays a single balance as a matter of convenience.
So, if your account has three UTXOs of 0.1 BTC each, and you want to send 0.3 BTC to someone, a transaction is created comprising those three UTXOs and added to the mempool, the queue that holds all pending transactions.
Each of those UTXOs requires that a digital signature be calculated, and all three signatures must be included in the transaction. Currently, Bitcoin signatures are calculated using a complex algorithm known as ECDSA.
Eventually, miners verify the signatures and add your transaction to a block. Compared to a simple transaction with only one UTXO, those extra signatures take up additional space and require more computer power to verify.
Schnorr Signatures to the Rescue
Taproot replaces ECDSA with Schnorr digital signatures. You don’t need to understand how they work; just know that Schnorr is better for several reasons.
- They’re smaller, a maximum of 64 bytes, compared to approximately 72 bytes for ECDSA signatures.
- In the example above, only one Schnorr signature is needed for all three UTXOs. This further reduces the transaction size and CPU load.
- The Schnorr algorithm itself requires less computer processing power, so signatures can be calculated more quickly and efficiently.
Why Taproot is Good for Bitcoin
Taproot can reduce Bitcoin transaction times. Blocks usually include thousands of signatures and can make up over a third of total blockchain data. With fewer and smaller signatures, more transactions can be packed into a single block. When the mempool gets crowded, this means a transaction could be included in a block sooner, reducing confirmation time.
Privacy and security are enhanced. Single-signature confirmation and more complex MultiSig or time-locked transactions can be mixed, making it harder for forensic software to trace them. Also, the upgrade makes it impossible to modify a signature before it’s confirmed.
Taproot makes it possible for developers to create more complex types of transactions that could make Bitcoin smart contracts feasible. This could eventually lead to more practical applications for Bitcoin, enhancing its value.
Finally, Schnorr signatures will make Bitcoin a little better for the environment. Computer processing requires electricity, and a faster and simpler algorithm reduces the demand.
Will the Taproot Bitcoin upgrade reduce Transaction Fees?
Fees are expected to drop, though it’s not yet clear how much. When the Bitcoin network gets busy, transaction fees creep upwards. Taproot will help clear the mempool a little faster, which should reduce peak fees.
All things considered, the Taproot Bitcoin upgrade promises to give Bitcoin a needed shot in the arm. It will be interesting to watch how this affects its attractiveness as a currency.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.