What is the Bitcoin Taproot upgrade?
How does the Bitcoin taproot upgrade affect you and your Bitcoin wallet, especially if you use a multisig wallet?
The way spending Bitcoin works under the hood has evolved many times since Bitcoin was invented. Taproot is the latest upgrade to how Bitcoin transactions work, and it brings real benefits to Bitcoiners.
Let's cut to the chase and highlight the benefits of Taproot, then we'll quickly explain how this Bitcoin upgrade works technically.
Benefits of Taproot for Bitcoin
- Reduced transaction fees. The transaction data size for making complex Bitcoin transactions is dramatically reduced. That means transaction fee costs for using more complex Bitcoin wallet features (such as multisig, or time-locking) will decrease significantly. It will be much cheaper to send a transaction from your Bitcoin multisig wallet!
- Increased privacy. With Taproot and Schnorr signatures, Bitcoin wallets with more complex spending conditions, like a multisig wallet or one that uses time-locking, will no longer be distinguishable from simple single signature wallets unless they spend the funds using their "uncooperative / recovery" spending conditions. This will let more complex wallets "blend in with the crowd" better from the perspective of on-chain analytics.
- More wallet functionality. Developers can work on creating vaulting logic that is better protected against permanent loss by having multiple timelocked redemption conditions. As an example of this, you could create a 3 of 5 multisig wallet that "gracefully degrades" to a 2 of 5 wallet if you don't move funds from that wallet for 5 years. This would allow you to recover your Bitcoin even if you lose 3 of your 5 keys! In a situation like this, the privacy benefit of Taproot is important - you wouldn't want someone else knowing that this is how your wallet is set up simply by looking at your on chain data.
How does Taproot actually work?
Bitcoin's scripting language may seem simple and restrictive, but it offers a deceptive amount of functionality. It enables everything from simple, single signature wallets to complex multi-signature, hash time locked contracts like those used to run the Lightning Network. However, these more complex Bitcoin contracts have historically been expensive to use.
Before Taproot, if you wanted to use a complex Bitcoin script, you would have to post the entire script inside of each transaction input when spending funds. This made such transactions take up a lot of blockchain space, so they were expensive to execute.
However, Taproot uses a structure called Merkelized Abstract Syntax Trees to partition the execution of complex Bitcoin scripts, so that you only need to reveal the parts of a script that get executed.
During normal wallet operations, a threshold of keys are used to craft what appears to the rest of the world to be a single signature. But in the case where keys have been lost, you can conditionally execute and expose only the logical branches that are being redeemed.
As wallet developers begin to take advantage of more complex scripting with Taproot, I expect we'll see the development of novel redeem script conditions accelerate. Though, as with any powerful tool, we'll need to take care not to overcomplicate things and shoot ourselves in the foot.
What Casa Clients Can Expect with the Taproot upgrade
The Taproot upgrade is backwards compatible, so when it goes live, your multisig wallet will continue working as it does today. Once our software and hardware dependencies support Taproot functionality, we can integrate it into Casa.
At that point, we'll seek to make migrating to a Taproot-enabled wallet as painless as possible. The migration process will be quite similar to the regular transaction signing flows with which you are familiar, it will just create a transaction that moves funds into a Taproot-enabled address. There will be no rush to upgrade your wallet; you may do so at your own convenience.
In addition to the default privacy benefits you'll get by upgrading to a Taproot-enabled wallet, we'll be exploring ways we can improve security for our clients with the new Taproot features.
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