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Bitcoin Takes One Step Closer to a More Scalable and Private Future

Key Takeaways

  • The codebase for Schnorr signatures and Taproot technologies were recently merged into Bitcoin Core.
  • The new technologies will enable cheap and private transactions, which may further benefit other technologies like Lightning Network.

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Bitcoin Core is relatively conservative, prioritizing simplicity and security over an abundance of features. That doesn’t mean the network is the same as it was back in 2009, however. 

After the release of segregated witness (SegWit) in 2017, it was revealed this week that Bitcoin has two more major upgrades on the horizon. Schnorr signatures and Taproot will offer the premier crypto network improved scalability and privacy. 

Schnorr Signatures

Understanding the benefits of Schnorr signatures requires knowing a bit about what a digital signature is and how it’s used in Bitcoin. 

A digital signature is like using a fingerprint to access data on the blockchain. Think of it as something like Touch ID: if you want to control your phone, you need to prove it’s you, so you place a finger over a sensor for verification. 

When you create a crypto wallet, you receive a private and a public key. The private key is like your fingerprint, and the public key is like your phone. 

You can use the private key to authorize outgoing operations from your wallet, which is called “signing.”

Currently, the algorithm used for signing is the Elliptic Curve Digital Signature Algorithm (ECDSA). This mechanism was used because Schnorr signatures were still under patent and not widely available until after February 2008. 

ECDSA provides similar functionality to Schnorr signatures, but overall it’s inferior. For instance, Schnorr signatures are more secure, can enable better privacy, and save space on-chain. 

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Now that this new signing mechanism is coming to Bitcoin, the network will enjoy a minimum of 15% improvement in space efficiency.

Imagine you received BTC from multiple addresses, and now you want to spend them in a single transaction. ECDSA would require you to sign each individual input you received. With Schnorr signatures, however, you could bundle these transactions into a single operation. 

Having one signature to replace several reduces transaction costs because you occupy less space in the block. 

Another benefit Schnorr signature offers is privacy. Just as you can sign several inputs all at once, you can also create a signature that will cover users’ inputs, effectively making a joined transaction. An outside observer won’t be able to see how many people signed the transaction, which obfuscates your actions.

Schnorr Signatures on Bitcoin
Traditional vs. Schnorr signatures (green). 

Finally, Schnorr signatures can be used for faster network verification by allowing batched validation.

Taproot

You may be surprised, but Bitcoin has smart contract functionality. Although it’s much more primitive than what Ethereum offers, it still enables fast payment sidechains like Lightning Network.

The major issue with smart contracts is space inefficiency. Taproot helps to fix this while bringing privacy benefits along the way.

Not all Bitcoin addresses and transactions are equal. There’s a distinction between the addresses that start with “1” and “3,” for instance. Addresses that begin with “3” are scripts, meaning that they may be used by several people or implement segregated witness (SegWit) technology.

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Taproot gets rid of this distinction. With it, all transactions look just like regular transactions from one person to another, no matter how many people participated and whether a smart contract was involved. 

To illustrate, imagine a payment channel that Alice and Bob set on the Lightning network. Once they are done with their business, they need to close the channel and take their BTC. 

Without Taproot, the channel’s closure would involve creating a bulky transaction, which would reveal a lot of details about what happened. With Taproot, this operation would appear as a regular transaction distributing funds to Alice and Bob, as if a third-party had sent them BTC.

Next Steps for Bitcoin

Adding code for Schnorr signatures and Taproot to the Bitcoin Core codebase is an important step towards their implementation. However, a substantial amount of time is likely to pass before they go live on the network. 

The good news is that both solutions are backward compatible, which makes their implementation easier. All of the legacy features will remain in place, so it doesn’t harm the node operators and users if they accept the changes.

As it stands, there are two possible ways the implementation can go: BIP 8 and Modern Soft Fork Activation

Both of them include a signaling period, during which miners can upgrade, but the latter has a six-month review process after activation.

Regardless of which solution the community chooses, neither of these technologies will be available immediately. Bitcoin is not famous for going fast and breaking things, and this time is no different. so good stuff has to wait. 

Still, users can take comfort in the fact that Schnorr signatures and Taproot are nearly at the finish line.

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