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Bitcoin’s first update in four years has now been made live. It is a rare instance of stakeholder consensus, and it is significant for the world’s most popular cryptocurrency. The Taproot upgrade improves transaction privacy and efficiency – and, more importantly, it enables the implementation of smart contracts to eliminate the need for middlemen in transactions.

Unlike bitcoin’s 2017 upgrade, which has been dubbed the “final civil war” due to the controversial ideological split that divides supporters, Taproot enjoys near-unanimous acceptance, in part because these modifications entail comparatively modest code improvements.

What difference does it make?

As with any other blockchain network, Bitcoin is updated on a regular basis, courtesy of the Bitcoin core developers. These upgrades, which are sometimes referred to as soft forks, provide the Bitcoin network with additional features and advantages. Taproot is a combination of three Bitcoin Improvement Proposals (BIPs), which are design specifications for introducing new features and data to Bitcoin.

Schnorr Signatures (BIP 340), Taproot (BIP 341), and Tapscript (BIP 342) are the three BIPs for Taproot. These three improvements are together referred to as BIP Taproot. The update introduces more efficient, flexible, and private ways of bitcoin transfer.

Now, let’s go a little more deeply into the three BIPs and the changes they involve.

Schnorr Signatures – BIP 340 (Saving Space – reducing fees)

The protocol on the Bitcoin network supports Schnorr signatures. Schnorr signatures are digital signatures generated by Claus Schnorr’s Schnorr signature algorithm.

As such, BIP 340 would provide a number of improvements to Bitcoin, including more anonymity, decreased transaction costs, and a more flexible multi-sig. The BIP defines the encoding of Schnorr public keys and signatures for use in Bitcoin.

Schnorr signatures employ 32-byte public keys, compared to the 33-byte public keys used by the previously used Elliptic Curve Digital Signature Algorithm (ECDSA). Schnorr signatures are 65 bytes in length, but ECDSA signatures are typically between 71 and 72 bytes in length, including a sighash flag that indicates which portion of the transaction is signed by the ECDSA signature.

The tiny amount of space saved as a result of this adjustment results in fee savings for Bitcoin users that utilize Taproot.

Taproot – BIP 341 (A more flexible Bitcoin)

To put it simply, the protocol specifies how the Bitcoin protocol will integrate Schnorr signatures. To be precise, the Bitcoin Script must be upgraded to include support for Schnorr signatures. Additionally, it has Merkelized Alternative Script Trees (MAST), which enables users to restrict output to several scripts.

Pay-to-Taproot (P2TR)

Taproot also brings a new way of Bitcoin spending. Pay-to-Taproot (P2TR) enables users to switch between a Schnorr public key and the Merkle root of a variety of different scripts.

The new script type will enable users to create a UTXO, which is a term that refers to the amount of digital currency that remains after a cryptocurrency transaction is completed and can be unlocked and spent by the user who possesses the private key or anyone who meets the requirements of any script within the Merkle tree.

Key Aggregation

Schnorr’s key aggregation feature enables this flexible functionality. Bitcoin is locked to a single public key called Q when it is transferred to a P2TR output. The public key Q is composed of a public key P and a public key derived from the Merkle root of many other script types. This enables the output to be spent using any of the other scripts in the Merkle tree.

When spending rather than receiving, this offers the opportunity for a user to select between complicated, arbitrary scripts and basic pay-to-public-key capabilities. Additionally, it uniformizes the appearance of all Taproot outputs.

Due to the fact that multi-sig outputs, single-sig outputs, and other complicated smart contracts all appear identical on the blockchain, many chain analysis heuristics will become ineffective, ensuring the anonymity of all Taproot users.

Tapscript – BIP 342 (Improving P2TR)

BIP 342 adds and changes various opcodes, which are segments of machine language instructions that specify the operation to be executed. These new scripts, generally known as Tapscript, assist in confirming Taproot spends and Schnorr signatures.

This was done to maximize future P2TR budget flexibility and to allow for unplanned improvements.

How does this benefit Bitcoin?

The Taproot update helps both taproot users and non-taproot users. In short, purchasing Taproot outputs is substantially less expensive. The greatest benefit is privacy, and the addition of Schnorr signatures and key aggregation ensures that all Taproot users have better privacy.

Additionally, Schnorr signatures erase any signature malleability that may exist in ECDSA signatures. The SegWit update resolved transaction malleability, while Taproot addresses the malleability of signatures that remained as an ECDSA feature. This increases the overall security of the Bitcoin network.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.