Taproot: Improving Bitcoin Privacy And Scalability

Before explaining what Taproot means and why it is important to cryptocurrency development, it takes a few previous steps to explain how Bitcoin maintains its decentralization during its updates. Unlike other cryptocurrencies, there is no one responsible for the code or the proposition of a roadmap a priori, so how is Bitcoin code improved?

Improving an ownerless code

Immutability is a feature of all blockchains, which makes many people think that Bitcoin code is immutable as well. Which is not true. The survival of a cryptocurrency requires constant improvement of its protocol: cheaper fees, faster and more anonymous transactions, and other adjustments will always be necessary.

The need for cheaper gas in Ethereum is perhaps one of the most obvious cases of necessary upgrades currently on the market. The high fees required by the network make the execution of DeFi transactions practically impossible and impede the good development of the ecosystem. To address this issue – and a few others – Vitalik Buterin is leading a transition from Ethereum to Proof-of-Stake.

But Bitcoin has no owner. How is the Bitcoin protocol updated? Can everything be modified? How is it decided which proposal will be chosen? Do all network agents agree on the future of the protocol? Unlikely. How does a network reach a consensus without resorting to the authorities?

Bitcoin Improvement Proposal (BIP)

When a developer wants to suggest a change to the protocol that does not conform to strict consensus rules, he must do so through a process known as Bitcoin Improvement Proposal (BIP).

The addition of new rules to the consensus protocol must be done through a soft fork, a voluntary and compatible update with the other versions of the protocol. Removing a consensus rule requires a hard fork, a fork in the network that makes it incompatible with previous versions and originates a new currency.

After submitting a BIP to the community, it will go through numerous debates, revisions, and improvements until it can be taken to the miners who must signal whether or not they accept that update.

BIP can describe protocol changes, the addition of any interoperability applications, community guidelines, and so on.

Bitcoin Improvement Proposal

In 2017 we had the SegWit update, an update that caused a major civil war over the network’s hashrate. Since then, no major updates have been made to the Bitcoin network.

Taproot: combining different solutions

Taproot was first proposed by Gregory Maxwell and evolved into BIP 341 as an update capable of expanding Bitcoin’s smart contract functions while increasing your privacy by masking complex smart contracts as an ordinary Bitcoin transaction.

Numerous proposals with these objectives had already been suggested. Because separating them into independent updates would reduce update efficiencies, the BIP 341 combines several technologies to improve Bitcoin’s scripting capabilities, such as Schnorr signatures (BIP340) and Merkle branches(“MAST”, BIP114 , BIP117).

To understand Taproot, you first need to understand the conditions of a Bitcoin transaction.

Bitcoins are always “locked” in scripts that tell you what the conditions are for the asset to be spent. Conditions always involve signing the transaction, but it can also involve more complex structures, such as time conditions (height or date of a block Bitcoin can or should be spent) or requesting a specific number of signatures, such as the case of transactions that require multi-sig.

Conditions can be combined in different ways, creating more or less complex transactions.

Without Taproot, the execution of transactions necessarily reveals all the transaction conditions and with that, it triggers two big problems: a large volume of data on the network and the users’ lack of privacy when revealing their spending conditions.

MAST

Different solutions have been proposed to solve these problems, one of the most popular is MAST (Merkelized Abstract Syntax Tree). MAST uses Merkle trees and creates a framework in which different conditions under which funds can be spent are individualized. With that, only the executed condition is revealed and not all those that are part of the script.

SCHNORR

Schnorr allows multiple signatures of a transaction to be combined into one, just like multi-sig. By combining public keys and signatures through the SCHNORR structure, a multi-sig transaction can become indistinguishable from any regular transaction. In short, anyone who does not know that an original key pair has been set will not be able to identify its initial conditions.

TAPROOT

Taproot allows all participants in a transaction to agree on its outcome and sign a settlement transaction together, combining their signatures and public keys to create a new transaction.

By adding this capability to Schnorr, it is possible to satisfy the complex conditions of a transaction with cooperation between settlement participants and at the same time make the transaction look normal a simple P2P transaction.

By combining the three technologies, users can benefit from complex transactions, robustly maintaining their privacy, while helping with BTC’s scalability.

BTC's scalability
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