Taproot is the name given to an upgrade in the Bitcoin network that was meant to speed up transactions. The efficiency gains were designed to also reduce costs. The biggest argument against Bitcoin as a payment system (i.e. medium of exchange) is that it was too slow and the transaction fees could get expensive.
Unlike the previous upgrade, which resulted in a split of the community and the formation of Bitcoin Cash, this one carried less controversy. This upgrade was backward compatible with the older versions of the software meaning there was no need to run two parallel blockchains.
It was approved in June of 2021 with the soft fork taking place on Nov. 14, 2021.
The Importance of Taproot
Taproot optimizes scalability, privacy, and smart contract functionality. It introduces about a new address type, allowing Bitcoin spending to look similar regardless of whether the sender is making a simple payment, a multi-signature transaction, or using the Lightning Network. Taproot addresses will allow users to save on transaction fees compared to previous address types. By reducing the transaction size and making nearly any transaction appear like a simple, single-signature one, this will also enable larger and more complex operations to be deployed on the Bitcoin network that were previously unfeasible or almost impossible.
The value in Taproot comes in the potential for future development. An example is the belief that this will allow for the proper scaling of Lightning Network. Another is the addition of smart contracts which could open the door for decentralized finance (DeFi) to take place on Bitcoin.
How It Works
Bitcoin verifies transactions individually by validating a digital signature against a public key. With Taproot, the network allows multiple and complex signatures like multi-signature wallets be aggregated and verified together.
Before the upgrade, the network used Elliptic Curve Digital Signature Algorithm (ECDSA). This algorithm creates a signature from the private key that controls the wallet and verifies that the rightful owner carries out the transaction.
Post Taproot, the transition to Schnorr signatures was undertaken. This is general more secure than ECDSA. The batching of transactions produces single signature validation. Multiple collaborating parties can produce a single signature valid for the sum of their public keys, enabling a more straightforward and more efficient method.
Aggregating signatures provides the ability to maximize the block space, thus scaling the network. This is seen as the major barrier to widescale adoption.
Privacy is also enhanced since there is no distinction between multi-signature and single-signature transactions. It becomes difficult to identify the individual's transactions where the data is stored.