Bitcoin Taproot locked in to improve privacy and introduce smart contracts

Published at: June 26, 2021

On June 12, Bitcoin (BTC) mining pool Slush Pool mined block 687,285 with the transaction including a Taproot upgrade activation signal. That particular block was the 1,816th to include a signal for Taproot activation by a BTC miner within the difficulty epoch that lasted from May 30 to June 13.

With 2,016 blocks created every difficulty period, crossing 1,816 blocks with a Taproot activation signal satisfied the 90% signaling threshold required to lock in the upgrade. This event meant that Taproot, Bitcoin’s first protocol upgrade in over four years, was set for its activation phase to be expected in mid-November.

Apart from bringing an end to the signaling period that lasted about six weeks over three consecutive difficulty epochs, block 687,285 also brought forth a new milestone for the Bitcoin upgrade in development since 2018. BTC proponents say beyond the automatic activation happening near the end of the year, the focus should now shift to building wallets and other ecosystem applications that can leverage the improved scripting capabilities brought on by Taproot.

What is Taproot?

Before getting into the nitty-gritty of what Taproot is and how it works, it is perhaps important to present at least a high-level explanation of how Bitcoin transactions work. When sending BTC from one wallet to another, the sender’s public address uses a private key to create a unique cryptographic signature.

This cryptographic signature contains the necessary permissions that serve as proof to any nodes validating the transaction that the sender truly owns the funds being sent, thus fulfilling the spending condition. It is possible to create different spending conditions for unspent transaction outputs (UTXOs).

When UTXOs are spent, it becomes necessary to reveal all spending condition data — both the ones satisfied and the possible conditions that could have been met — a feature that comes with significant data usage and privacy implications. Taproot is an upgrade designed to solve this issue by masking spending conditions, except those that are in the branch of the script agreed upon by the transacting parties.

In a conversation with Cointelegraph, Riccardo Casatta, Bitcoin developer and one-time Square crypto grant recipient, outlined the basic premise behind Taproot, stating, “The taproot upgrade includes a bunch of improvements, the most significant enhances privacy in the long term.” According to Casatta:

“A misconception we have today is that Bitcoin usage is mostly private, while in reality, transaction activities leave a lot of traces on the blockchain. For example, Bitcoin is sent to different addresses — e.g., starting with ‘1,’ ‘3’ or ‘bc1,’ according to the version and the smart contract behind them. This is a problem because it reveals information about the user’s spendings.”

With Taproot, it becomes possible to combine the public keys of all participating entities in a transaction to create a unique key. By creating a new output called Pay to Taproot (P2TR), it is possible to have output conditions with locked funds to a single public key rather than individual key or script hashes that require a complete accounting of all spending conditions included in a UTXO.

This coalescing of multiple signatures into a single aggregate signature is based on Schnorr signatures. Taking advantage of the linear nature of Schnorr signatures, Taproot proponents say it will be possible to make multi-signature (multisig) indistinguishable from their single-signature counterparts, or as Casatta puts it:

“With taproot, different spending conditions may look identical in the most common case, and this is great because it reveals less information about users, and it also improves efficiency.”

Near unanimous support among miners

As previously reported by Cointelegraph, Bitcoin’s Taproot upgrade achieved the 90% critical consensus among mining nodes on June 12. Indeed, the process received near-universal backing from miners, with all recognized mining pools signaling for Taproot.

Slush Pool kicked off the process back in May, mining the first transaction block with a Taproot activation signal. It was, perhaps, fitting that the fifth-largest Bitcoin mining pool by hash rate distribution was also brought forth by the miner responsible for actually locking in the upgrade.

Despite the fact that the process for commencing the signaling period slowed down with China’s May Day celebration, the consensus among miners to support the upgrade began to reach significant proportions by the second difficulty epoch. This near-unanimous support cemented the commitment expressed by miners even before the planned upgrade was merged into Bitcoin Core in late 2020.

The initial delays in attaining the required 90% consensus during the first month of the process were likely due to some miners needing to adjust certain firmware requirements to perform signaling. Thus, even soaring to about 70% within the first three days, the miner signaling percentage fluctuated between 40% and 70% over the first difficulty epoch.

AntPool and F2Pool — ranked first and second in terms of hash rate distribution, respectively — were early supporters of the activation, as was Foundry USA. By May 17, every major mining pool was signaling for Taproot, including Binance with its maiden transaction block. BTC.Top was late to the party, as the mining pool reported having to run tests on protocols required to begin signaling for Taproot.

Privacy, scalability and smart contracts

Several Bitcoin developers agree that Taproot will offer a significant improvement in Bitcoin’s privacy. In a conversation with Cointelegraph earlier in June, Pieter Wuille, Bitcoin developer at Chaincode and one of the earliest proponents of the Taproot upgrade, remarked:

“It [Taproot] extends Bitcoin’s script capabilities in ways that make certain things cheaper (especially more complex applications like multisig and layer-two things), and somewhat more private by often hiding what the exact spending rules were.”

Apart from masking certain spending conditions and making transactions indistinguishable, Taproot also offers a significant reduction in the block space occupied by transaction data. While this feature will reduce transaction throughput by compressing the data size associated with multisig transactions, it is hardly a panacea to Bitcoin’s scalability issues.

However, it opens the door for smart contracts on the Bitcoin blockchain since the upgrade already lessens the amount of space needed for multisig transactions in a block. Smart contract transactions by nature involve interactions among several addresses and users.

With Taproot, these smart contract operations will not appear to be any different from a simple wallet-to-wallet BTC transfer. Detailing some of the likely smart contract use cases that could emerge once Taproot is activated later in 2021, Casatta told Cointelegraph:

“In the middle/long term, I see an increase in Bitcoin smart contract usage, enabling use cases like inheritance and delegation in company spendings. And the best part is that, by looking at the blockchain, we will not know about that.”

Many Bitcoin developers agree that beyond the November activation, network participants will need to create useful applications based on the upgrade. The upgrade itself will activate according to the terms in Bitcoin Improvement Protocol 341 (BIP-341) at block height 709,632.

Taproot will be a soft-fork upgrade, meaning that network participants are not bound to adopt the change. However, given the likely fee advantages offered by the upgrade, service providers are likely to update their software to implement Taproot.