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June 27, 2022
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What is the Taproot update? DeFi on the Bitcoin blockchain

Taproot, the first Bitcoin protocol update in four years, will bring better privacy and security to the leading blockchain. Importantly, it will also improve the efficiency of smart contracts.

What is Taproot?

The long-awaited Taproot update for Bitcoin was approved by over 90% of the mining hashrate over the weekend. This signals that most of the community is ready to implement changes to the protocol. Taproot is the first Bitcoin update in four years, following the controversial Segwit update that gave birth to Bitcoin Cash. While Binance initially showed some resistance to Taproot, it now seems to have gained community-wide approval. Taproot was blocked at block 68728. SlushPool, one of the leading Bitcoin mining pools, mined this block on Saturday.

To understand the benefits of Taproot, it is imperative to understand how on-chain trading works. In essence, a public address produces cryptographic evidence that it has all the appropriate permissions to make the transaction. To do this, it uses its private key. In doing so, it provides a unique signature and proves that the transaction really comes from the user.

The crypto evidence is stored on the blockchain which explains why we can track every bitcoin transaction. By decrypting the cryptographic evidence in each block, you can track transactions between addresses and identify the sender and receiver based on their public keys.

Smart contracts are interactions between multiple addresses that allow for more complex transactions. While smart contracts are most often associated with Ethereum, they can also be created on the Bitcoin network. Smart contracts are built from code that dictates the terms of each transaction and can involve many different users.

Taproot will reduce fees

In the current form of the Bitcoin network, smart contracts require a huge amount of storage space on the blockchain. Since transaction fees are a function of the amount of space a transaction wants to take up on a block, they are very costly to create.

Taproot will combine the public keys of the users participating in the smart contract and create a new public key. This key can then create a unique signature that is only available to that particular combination of addresses. These digital signatures are called Schnorr signatures, invented by the German mathematician Claus Schnorr in the 1970s.

These signatures have two advantages over previous implementations. First, they hide the public keys of individual users in each smart contract. This means that only the unique linked public key is visible on the blockchain. Second, they drastically reduce the amount of space required in any block to create complex smart contracts. Especially since a smaller signature requires lower fees, which many Bitcoin users are likely to welcome. The cost of using the web hit new highs in April as the price of the original cryptocurrency soared.

As a result, Taproot will make the complex interactions of Bitcoin smart contracts look like simple payments between two public keys. The possibility of launching smart contracts potentially paves the way for Bitcoin to conduct similar DeFi activities that can be found on Ethereum. These changes will also apply to the Lightning Network. Taproot is scheduled to be launched in November 2021.

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