November last year saw the soft fork of the Bitcoin protocol that introduced support for Taproot.
The effects of the Taproot update on the Bitcoin blockchain
Although the Bitcoin protocol has been supporting this new technology for months now, it does not seem that its introduction has changed things much so far.
However, it is worth mentioning that in recent years Bitcoin’s innovations have never been particularly quick to spread. For example, Segwit was introduced in 2017, but only in 2020 did it start to be used by a significant number of users, while Lightning Network actually arrived in 2019, but only last year did its use take off.
Thus it is to be expected that Taproot will also have to wait a few years before it begins to be fully utilized.
Taproot’s soft fork among other things added Schnorr signatures, but above all changed the way Bitcoin scripts operate, with the aim of raising the level of on-chain privacy, improving scalability and security, and above all enabling the creation of new scripts that were previously too complex or expensive.
The first point on which Taproot could make a difference is privacy.
Indeed, to date the privacy level of Bitcoin’s blockchain is not particularly high, with all transactions public, and all data in the clear.
Instead, using the new Schnorr signatures, it is possible to use several private keys from different public addresses to generate several signatures that can be combined into a single signature within a single complex transaction.
In this way, the signatures created with the private keys of the wallets would no longer be stored on the blockchain, but only the overall signature.
While not hiding the addresses of the senders and receivers, the transaction would be indistinguishable from a normal multi-address transaction, making it impossible to know whether it was a complex transaction generated by multiple users, or a normal multi-address transaction created by a single user.
This will be true for any on-chain transaction, because by using Schnorr signatures, it will be impossible to distinguish the various types of transactions, which will all be similar to each other.
The creation of complex smart contracts on Bitcoin thanks to Taproot
Probably the greatest advantage will be to be able to create complex scripts, for even very complex transactions or transaction packages, which can be reduced to simple on-chain transactions with a single signature.
Without Taproot any complex script on the Bitcoin blockchain, or complex transaction, would have to be recorded as is, resulting in higher fees and loss of privacy. Instead, with Taproot, it is possible to create single, seemingly simple, and therefore inexpensive transactions that actually represent multiple scripts.
This increases the scalability of the Bitcoin blockchain, improves the efficiency of the blockchain itself and the scripts, offers greater privacy, and significantly reduces the fees for these kinds of simplified complex transactions.
Furthermore, by reducing the amount of data that needs to be written to the blockchain for complex transactions, it actually increases the number of transactions that can be recorded on it.
It is assumed that the update introducing Taproot will also end up generating more interest in the Lightning Network, and encourage multi-signature (multi-sig) solutions.
As it is easy to see, the mere introduction of these new features did not produce immediate and direct changes, as the real changes for users will only be seen when the new features are integrated into the various wallets, and then used.
Too little time has passed since their final introduction for them to have already been fully exploited by those offering Bitcoin services to users and the market, and there is still much to develop before these changes can become apparent to all.
It cannot be ruled out that we will have to wait until the next halving, in early 2024, before we can see significant new initiatives that exploit Taproot to increase the possibilities of Bitcoin usage.