The bitcoin blockchain underwent a major update over the weekend of 13 and 14 November 2021. This update is called the Taproot update. This is the largest update in 4 years. Privacy and scalability will be improved. Also, smart contracts will be introduced. This update is extremely important for the development of blockchain. In this blog, I will discuss the Taproot update.
General
Anyone who has ever bought or sold bitcoin will probably know: bitcoin is old-fashioned and the blockchain is slow. If you have been in the crypto market a bit longer, you have heard these arguments before.
Besides that there are many proponents of bitcoin, there are also many opponents. One argument that opponents often use is that bitcoin consumes an enormous amount of energy. This is a very valid point. Because the bitcoin blockchain uses the Proof of Work consensus protocol, a lot of electricity must be used to verify the transaction on the blockchain. Another argument is that bitcoin has absolutely no value and that bitcoin is a bubble that could burst somewhere in the near future. Opponents also claim that the bitcoin blockchain is outdated. The blockchain has many limitations. The bitcoin is not fast enough to be used as a currency. But there are many upgrades being introduced. So it is not that the blockchain is not being developed. It certainly is!
The Taproot upgrade in short
At the basis of this upgrade are the ''Schnorr signatures''. Bitcoin uses the Elliptic Curve Digital Signature Algorithm (ECDSA) cryptographic method for its digital signatures. With digital signatures, a user signs a certain transaction with his private key to approve it. Once the user has signed his digital signature with the private key, the transaction can be executed.
Taproot will be upgraded to a different type of system, namely the Schnorr. Every transaction that uses Taproot will now also use this digital signature system. The Schnorr adds capabilities to improve the privacy, security and scalability of bitcoin transactions.
A positive consequence of this upgrade is that a transaction that requires multiple digital signatures, where more than one person from a group of signers must sign a transaction, will be faster because less data is required to sign.
Due to this upgrade, a reduced amount of data has to be transferred and stored on the blockchain. This increases the number of transactions per second and reduces transaction costs. Scalability increases.
Let's dive deeper...
Besides Schnorr, another important update is the MAST.
- What is Mast?
MAST stands for Merkelized Abstract Syntax Tree. Before we get into this technique, I will first briefly discuss how the bitcoin blockchain executes smart contracts.
Smart contracts are created with conditions that must be met before a smart contract can be executed. It has an if x, then y reasoning. If x conditions are met, then y will occur. You could include a condition that the coins can only be moved after 4 days. If this condition is met, then the coins can be sent (the smart contract is executed because the condition is met).
The conditions of a smart contract cannot be viewed by everyone. Only the owner can actually see the conditions. This is because all the conditions are encrypted by means of one hash. This is also called the P2SH (pay to script hash). When the condition is fulfilled and the coins are sent, the condition and the corresponding hashes are revealed. Anyone can now check that the hash of the condition is the same as the initial hash.
A major disadvantage of P2HS is that every time one of the conditions is fulfilled - of a smart contract - all the other conditions are revealed at the same time. This allows others to see and find out how the money could have been spent and poses a privacy risk. Another disadvantage is that for each condition in the smart contract a lot of data has to be written. This has a direct impact on transaction costs.
- Why is MAST better than P2HS?
MAST is a way to solve the privacy and data problems of bitcoin smart contracts. P2HS thus reveals all the conditions of a smart contract after a condition is fulfilled. The advantage of MAST is that you can hash each condition separately. That is, all the conditions are hashed, and then you hash those hashes again until you have a single hash at the top. This is also known as the Merkle root. If you reveal a condition, the other conditions remain invisible, because the other conditions have their own hash.
- The Schnorr
Not to be confused with the "snor" in Dutch. This is a moustache.
The Schnorr digital signature is to replace ECDSA. The Schnorr signature was developed by Claus Schnorr. This technique could not be used because Schnorr had a patent on it. This patent expired in 2008. The creator of the bitcoin blockchain (Satoshi) chose the ECDSA over the Schnorr signature because they were better known and also open source.
- Single signature and multi signature
All transactions on the bitcoin blockchain must be signed before they can be transmitted and sent to another address. Transactions therefore require a single signature (basic wallets) or multiple signatures (multisig wallets). Basic wallets can be managed by one owner. Multisig wallets require multiple signatures to be able to send a transaction over the blockchain.
Multisig transactions must be signed by multiple private keys. A multisig policy could be that at least 8 out of 10 private keys of a wallet must successfully sign the transaction before it can be sent.
- Why is Schnorr better than ECDSA?
The bitcoin blockchain does not support multi sig wallets. The bitcoin blockchain uses a different route to allow such multi sig transactions. This makes the transaction larger and directly affects transaction costs. There are transaction costs associated with each signature. This can be an expensive joke. This is especially a problem with larger multi sig wallets. For example, a wallet with 50 private keys that need to sign a transaction.
Another issue is that if the ECDSA signature is used, anyone can see which wallets were used to sign a transaction. This is not good for privacy because they will be revealed on the blockchain.
Transactions signed using Schnorr are indistinguishable between single and multi-signed transactions. This is because the length of the signature is the same. For example, if we look at a transaction on the blockchain, both single and multi-signed transactions will look the same. All the signatures from the multi-sig wallet are combined into a single signature that then signs the transaction. This means that the other private keys do not all have to sign this transaction separately. This ensures privacy because all signatures are combined into one private key that signs the transaction (not distinguishable from other transactions). It also solves the cost issue, as less signatures are required to sign the transaction.
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