The Bitcoin network has successfully implemented the latest major update since 2017. The Taproot upgrade is an upgrade that offers greater privacy of multi-signature transactions and unleashes the potential of smart contracts on the Bitcoin blockchain.
The Bitcoin Taproot upgrade is the first soft fork after the Segregated Witness (SegWit) upgrade in 2017. The initial rumblings of a new soft fork came about as early as Jan 2018 from Bitcoin Core developer Gregory Maxwell. Taproot was agreed upon almost unanimously in June 2021, following consensus changes in Bitcoin Improvement Proposals BIP340 (Schnorr signatures), BIP341(SegWit output conditions), and BIP342 (Validation of taproot scripts).
BIP340 defines a standard for Schnorr signatures and the Taproot construction. The three proposals are said to make Bitcoin more private and space-efficient by aggregating multiple signatures into one. BIP342 enables a type of payment called Pay-to-Taproot, which allows users to transact via a Schnorr public key or other ways. It can provide user choice, where some transactions can be visible and others public.
Smart contracts on Bitcoin
Bitcoin smart contracts are written in a language called Script, which allows conditions to be specified to unlock funds e.g. only disbursed after a certain period of time, a multi-signature condition, or other things. Bitcoins are locked in a script, before locking them and unlocking them in another script.
“When Bitcoin is sent to a Merkelized Alternative Script Trees (MAST) output, the Bitcoin is locked to the Merkle root of these scripts, and to redeem the bitcoin, the spender must reveal the script which they are using to unlock the bitcoin, as well as proof that this script is included in the Merkle root of the previous transaction.” - Arcane Research
The spender of a MAST output only has to reveal the script they used. The number of scripts is invisible. If Person A send Person B one bitcoin, but Person A only wants it to be given to Person B after a number of conditions are met, then all of those conditions would be visible on the public ledger, which could compromise the privacy of Persons A & B. Merkelized Alternative Script Trees (MAST) hides the conditions of the smart contract and compresses the information.
Tapscript is the next innovation of the Taproot soft fork. It is a scripting facility that increases the size of allowed scripts. It also allows partially executed scripts to make visible their execution code only as the code is used. Scripts are only unveiled at the time of spending.
Schnorr Signatures mean greater privacy
The Lightning Network, Liquid, and other sidechains use scripted rules like multi-sig and hash time locks to make their scripts secure. Before the soft-fork, all this information was visible to the whole network. The soft-fork will allow transactions like the Lightning channel to open to look like a regular transaction.
If a transaction must be signed by multiple signatories (multisig), each private key owner must calculate their signature and include it in the transaction. Before the Taproot upgrade, bitcoin used the Elliptic Curve Digital Signature Algorithm (ECDSA) for signing transactions. But the addition of Schnorr signatures will mean that transactions will be verified quicker. Schnorr signatures allow transactions requiring multiple signatures to look as if they were single-signature transactions on the public ledger. The Schnorr signature will hide that a MAST structure even existed. Since only one signature is computed to represent all parties, less information is recorded for each transaction, and there is an increased degree of privacy.
