What is the Taproot update? It is one of the most important Bitcoin updates ever planned. Taproot is also the first major Bitcoin update in four years. This article is a Taproot beginner’s guide. It explains Taproot from the technical point of view and goes through Bitcoin’s development process.
Bitcoin’s development and Bitcoin Core
Before we dive deeper into Taproot, it’s important to understand how Bitcoin is developed. This process has changed a lot since the early years.
An unknown person called Satoshi Nakamoto published the Bitcoin white paper in 2008 and started the Bitcoin blockchain in January 2009. Satoshi was also the head developer of Bitcoin. In 2009, there was just a handful of people helping him with the project.
The Bitcoin community grew to thousands of members in 2010. A wide discussion began of Satoshi’s role and how Bitcoin should be developed. Back then, Satoshi was still making updates without asking anyone’s permission.
After December 2010, Satoshi moved to the background and Gavin Andresen took charge. The last confirmed message of Satoshi was sent in April 2011. The mysterious founder has been missing ever since.
Bitcoin became a truly decentralized project after Satoshi. There has been a decentralized group of developers in charge ever since. Bitcoin is developed by both individuals and technology companies, like Blockstream. Anyone can join the Bitcoin project and take part in the discussion.
Some of the readers might be thinking now: what is actually being developed? What is Bitcoin?
Bitcoin is software that runs on computers. Satoshi Nakamoto programmed the very first implementation of Bitcoin in 2007-2008 using the C++ language. Bitcoin has been an open-source program from the beginning. Anyone can use the program code to create a different version of Bitcoin. This has also been done multiple times.
The most popular implementation is called Bitcoin Core. You can download the program from bitcoin.org. The Bitcoin network is permissionless by nature. This means anyone can download the program and join the network. There are lots of how-to-guides on Youtube.
A computer running Bitcoin Core is called a node. There are about 10,000 known nodes in the network, but probably 40-50,000 unknown ones. Maybe even more. Nodes are spread all over the world.
When we talk about Taproot and other Bitcoin updates, it means new versions of the Bitcoin Core program. The actual development work is done in GitHub.
There is one interesting fact when it comes to Bitcoin Core. The official version is 0.21.1 at the time of writing this article. Not 1.X.X. It means that Bitcoin Core is technically still a beta version.
Bitcoin Improvement Proposal (BIP)
Let’s go through Bitcoin’s development process. How does an idea become a program code update in a decentralized community? This is where Bitcoin Improvement Proposal, BIP, is introduced.
The first-ever BIP was done by Bitcoin developer Amir Taaki in August 2011. It is called BIP 0001 and it describes the structure of BIPs, how they are handled, and how they are finalized.
The image below shows how a BIP progresses.
In the first phase, an idea is presented to a larger audience in one of the discussion channels. Next, developers and other community members throw in their thoughts on the proposal. It’s very important that the proposal is largely accepted at this point.
If the idea gets most of the community behind it, there will be programmers and testers who want to participate. It’s like a snowball effect. If the idea is refused by many, it’s almost no point to waste further resources on it.
Nodes have the highest authority in the Bitcoin network. If you can’t get node operators behind your idea, it will never be implemented to the network.
All BIPs aren’t equally important. Some are generic suggestions, while others can modify the core components or even the consensus rules.
The more important the BIP is, the more difficult it is to get implemented. The critical BIPs have to get almost a unanimous consensus. They are also developed for several years.
A good example is the SegWit update, which was implemented in late 2017. The disagreements of the update split the Bitcoin community and led to a hard fork in August 2017. This is where a part of the community created Bitcoin Cash.
Bitcoin is known for its slow progress. It is very difficult to change Bitcoin, which is also one of its biggest strengths.
Hard fork and soft fork
There are two types of updates in the cryptocurrency world: hard fork and soft fork. The difference is that hard forks are not backward compatible. Let’s use your laptop as an example.
Every Windows laptop user has experiences Windows updates. There are new ones coming every month. Windows update is like a soft fork. Even if you wouldn’t install the update right away, you can still use your laptop. You might be missing some new features or security patches, but your laptop works just fine.
If Windows updates were hard forks, you wouldn’t be able to log in to your laptop before installing the upgrade.
Taproot, and previously mentioned SegWit, are soft forks. They improve the Bitcoin network, but nodes can still operate with the old version of the Bitcoin Core. For example, SegWit was implemented in 2017, but only half of the transactions are SegWit-based in 2021.
Bitcoin Cash is an example of a hard fork. It meant the Bitcoin blockchain was split into two branches. The only way to become a Bitcoin Cash node was to upgrade your software. This also meant your node was no longer compatible with the Bitcoin network.
Ethereum is a project, where hard forks are used regularly while moving towards the 2.0 version. Even if they are hard forks, it doesn’t mean the community would be divided in two constantly. The majority of the community has accepted these upgrades and all nodes simply must run them in order to be compatible.
What is Taproot?
Now we can learn more about the latest Bitcoin update. What is Taproot?
Taproot consists of several important updates bundled together. These are BIP 340, BIP 341, and BIP 342. It includes updates to privacy, scalability, and security. See the video below for a short Taproot explanation.
At the core of the Taproot is a technology called Schnorr Signatures. It replaces the current Elliptic Curve Digital Signature Algorithm. Satoshi Nakamoto had to use ECDSA when he created Bitcoin because Schnorr Signatures was protected by a patent until 2018.
This update is going to change multi-signature and scripted transactions. These are special types of transactions, which are signed by using multiple keys. There could be also some scripted conditions, which have to be met before coins can be spent.
Currently, these special transactions look different in the Bitcoin blockchain data. It means they can be easily picked out by network analytic companies.
After Taproot, multi-sig and scripted transactions look like standard wallet-to-wallet transactions. This improves their privacy significantly. It also means the space requirements of such transactions become smaller.
This is why Taproot improves scalability. There will be more transactions in each block after the Taproot upgrade. The validation processing becomes also easier for each node. It’s very good for the Bitcoin network in the long run.
Taproot will also introduce a new address type. Any address starting with a string ‘bc1q’ is a SegWit address. A Taproot address begins with ‘bc1p’.
The Lightning Network benefits too. Taproot makes Point Time-Locked Contracts (PTLC) possible. These transactions improve Lightning Network’s privacy and make it more error-proof.
Opening a Lightning Network channel is also a previously mentioned “special type” of transaction. Taproot makes opening and closing a LN channel cheaper.
Taproot was introduced in January 2018 by Bitcoin Core developer Greg Maxwell. It means this project has been developed for 3+ years. In October 2020, Taproot’s program code was merged into Bitcoin Core. After this, it’s only been a question of when.
The final phase started in May 2021. This is called the signaling period. You can follow its progress at taproot.watch. The purpose of the signaling period is to get the final approval from mining pools.
The picture below shows the progress at the end of May 2021.
A signaling period lasts 2016 blocks meaning two weeks. Taproot will be confirmed when 90% percent of new blocks have the Taproot signal in them.
Each mining pool gives the signal by adding a small piece of code to the blocks when they are being mined. These are the green blocks in the picture.
If the 90% threshold is not reached, a new signaling period beings. It’s very likely that the 90% threshold is reached in June 2021.
If nothing unexpected happens, Taproot will be activated in November 2021. Since it is a soft fork, it’ll take several years until Taproot is updated by all Bitcoin nodes.
The impacts of Taproot
Taproot is the most significant update in Bitcoin since 2017. Some argue that it’s even the most important update ever done. What are the impacts of Taproot?
If we think of the Bitcoin community, there is a huge difference between Taproot and SegWit. The year 2017 was a chaotic time. The Bitcoin community was having a civil war leading to a hard fork. The community almost split again in November 2017 due to SegWit2X hard fork. This was eventually canceled.
Taproot hasn’t caused any drama, so far. The signaling period has progressed nicely and there are few people opposing this update. It’s unlikely we’ll see any dramatic events later in 2021.
If we think of an average Bitcoin user, the significance of Taproot is small. Bitcoin is not going to become a new Monero. Taproot isn’t some miracle scaling solution either. Transaction fees might drop, but the general network congestion still has a bigger impact on them.
Taproot is mostly seen by professional users and software developers.
AboutBitcoin.io would like to thank @VeetiPitkoilija for his help in making this article!