Bitcoin is considered the most popular digital currency, yet everyone regards it as the most archaic one. No wonder, as there weren’t any protocol upgrades for Bitcoin since August 2017. All other blockchains had countless soft and hard forks, but the main cryptocurrency just works as it is. The global financial community seems to be okay with it, as for them there’s no need to scale Bitcoin, which serves the role of the digital gold at this point. Here we’re going to talk about the future upgrades, as it’s going to greatly influence the development of the ecosystem. 

Currently, there’s a lot going on behind the scenes. There are the new updates around the corner, based on the concept of Schnorr signatures, the cryptographic algorithm allowing to conjunct many digital signatures into one, making it many times smaller. This soft fork is called Taproot, it has been in development for a long period of 3 years, and it’s going to drastically improve Bitcoin’s flexibility, scalability, and security. Even more, they are backward-compatible! That means that those miners that don’t want to support this soft fork, can still mine blocks in the old way. It’s the same as it was with SegWit – 2.5 years after soft forking, only 61.51% of all miners support it, one year ago it support was even lower, only 39%. Still, the network runs flawlessly. So, what’s the deal with Schnorr signatures and Taproot? 

Laying the Foundation – the Predecessors

The concept of Taproot lies in the MAST (Merkelized Abstract Syntax Tree), an old proposal from 2016, that didn’t get accepted by the community. Anyway, it contained some good ideas. Its developer, Luke-jr, wrote

“The idea of Merkelized Abstract Syntax Tree (MAST) is to use a Merkle tree to encode the operations in a script. When spending, users may provide only the branches they are executing and hashes that connect the branches to the fixed size Merkle root. This reduces the size of redemption stack from O(n) to O(log n) (n as the number of operations).”

So, the idea was to use the hash tree to reduce the size of transactions. Currently, miners write all the data that is associated with a transaction in the block. The MAST structure allows to include only the necessary branches of data. It allows to save space in blocks, but most importantly, it enables smart contract functionality. Smart contracts on Bitcoin blockchain – that would be groundbreaking. Anyway, the Taproot soft fork uses the same concepts. But first, let’s also talk about Schnorr signatures. 

Schnorr signatures were described by Claus Schnorr, a mathematician from Germany. His algorithm is known for its simplicity and is considered one of the best type of cryptographic signatures overall. They are fast to verify, allow for math to be performed on them, and thus, several signatures can be joined into a single signature. It creates many new possibilities, including the addition of privacy features. Schnorr signatures were first implemented in a BIP 174 by Blockstream developer Pieter Wuille in 2018. It was rather a draft but it demonstrated the concept with the new capabilities of Bitcoin to everyone. 

Among the earlier Bitcoin proposals, there was one particular privacy-oriented BIP, called CoinJoin, and it was introduced in 2013 by Gregory Maxwell, Bitcoin Core and Blockstream developer. It allowed to mix transactions between many addresses, making it almost impossible to track the coins and the recipients after completing the mixed transaction. It doesn’t require a soft fork, but it wasn’t very popular. Anyway, Gregory didn’t abandon the idea. He continued to develop it further. Schnorr signatures could add another incentive to using CoinJoin transactions because all participants can not only combine all their transactions into one but also combine their signatures in that transaction into one. That makes the transaction smaller than all these individual transactions, allows to put more transactions in one block, making the blockchain faster and helps users pay a smaller transaction fee. That’s how Taproot started. 

Better Privacy, Lower Costs – Bitcoin Taproot Soft Fork

Now the Taproot soft fork code, also started by Gregory Maxwell, is near completion, and it combines all the previous work of countless developers. It has privacy features, hiding the initial addresses from external blockchain observers, it has Schnorr signatures, which greatly improve scalability and it implements MAST-structures, enabling the functionality of smart contracts. MAST allows to lock Bitcoins with the release condition, these conditions can include secret numbers of participants or timelocks. These conditions are hashed in a Merkle Tree, thus the size of transactions with only one condition and with multiple conditions will be the same. Taproot also always includes one condition when all participants agree on the outcome and sign the settlement transaction together, releasing the held coins. 

Taproot will make the existing multi-sig implementations almost obsolete. Jimmy Song, the Bitcoin educator, said in one interview: “There will no longer be any penalties in terms of fees for multi-sig and that should lead the industry toward using best practices.”. It will allow to cut transaction fees for at least 30% for all crypto exchanges, which are actively using multi-sig wallets. BitMex research agrees on this: “In our view, the benefits associated with this softfork are not likely to be controversial. This soft fork appears to be a win-win-win for capability, scalability, and privacy”. 

Considering privacy, there have to be some issues with it. The problem is with the governments around the world, pushing laws that prohibit private coins. Bitcoin never had privacy, that’s why nobody cared. Now, with improved privacy, it won’t be tolerated by authorities. The many years of fighting for its adoption of financial markets will be in vain. On the other hand, it will be possible for large entities to own Bitcoin anonymously, and transact their funds whenever they want without making it to the headlines. We read news such as “the whale sent 200,000 BTC to an exchange” every day. Taproot will make it hardly traceable. It’s like a double-edged sword. Nobody knows how it will play out. Tim Ruffing, another Bitcoin developer, tells everyone:

“Reminder that it’s almost impossible to use Bitcoin in a privacy-preserving manner. We’ve been making small improvements, and continuing this work is important. But for serious privacy, we’ll need more fundamental changes.”

Anton Dziatkovskiy from Platinum Q DAO Engineering, a large blockchain developer company, agrees with Ruffing: 

“We think that privacy isn’t the killer feature of Taproot. After all, the volume of other private coins remains low. Scalability and smart contracts are the most important now, as it will allow Bitcoin to compete with other platforms of the next generation. Bitcoin is the most popular in terms of finances, but it’s considered the most outdated in terms of tech. Taproot will fix it. Our products, such as Q DAO stablecoin ecosystem, are heavily tied to Bitcoin blockchain, and we really welcome this improvement, we are already developing features that use Bitcoin smart contracts”. 

Conclusion

After many years of stalling, Bitcoin is finally moving forward. Taproot is nearly ready, and it will be rolled out soon. Again, it’s a soft fork, thus for Bitcoin miners, it’s entirely optional to upgrade to support it. There are many other small improvements in development, along with the improvement of the existing tech. The Lightning Network continues to grow, its capacity exceeds $8 million now, and it will be also compatible with the new soft fork. The future seems bright for Bitcoin, like never before, and now it has the chance to outshine all other blockchains not only by the capacity but also by its capabilities. Exciting, isn’t it?