Bitcoin is getting updated.
Taproot, the update to the Bitcoin protocol that makes smart contracts more private and compact, has been blocked. As of now, more than 90 percent of all blocks to be mined in the current difficulty period have signaled support for the update, meaning that Bitcoin Core versions 0.21.1 and the newest ones will start enforcing the new rules in November this year, as will the alternative Taproot activation client.
Taproot is the first Bitcoin protocol update to go live since Segregated Witness went live in 2017. First proposed by former Blockstream CTO Gregory Maxwell and developed by Bitcoin Core contributors including Pieter Wuille, Anthony Towns, Johnson Lau, Jonas Nick, Andrew Poelstra, Tim Ruffing, Rusty Russell, and Maxwell himself, Taproot will make Bitcoin’s smart contract features more compact, potentially more private, and in some cases a bit more flexible. As a soft fork, the update is backward compatible as long as most miners enforce the new rules.
Taproot really consists of two great updates in one. The first is the introduction of Schnorr signatures. Schnorr’s signature scheme is considered by many cryptographers to be the best in the field, as its mathematical properties offer a high level of correctness, it does not suffer from malleability, and it is relatively quick to verify. However, the most notable benefit in the context of Bitcoin is that Schnorr’s “linear math” enables a new class of smart contracts, where adjustments to a signature can be used to incorporate various spending conditions.
This signature setting is used for the second part of the update, which is the part that is actually called Taproot. Taking advantage of crypto tricks like Merkle Trees, Taproot allows users to cryptographically combine multiple spending conditions into a single output (simplified, in a single “direction”). Funds in this direction can be spent in multiple ways, for example by different people depending on what other conditions are met.
To a large extent, this is already possible in Bitcoin, but Taproot allows these different people to cooperate to make the transaction that spends the funds indistinguishable from regular (single-user) transactions. This is more efficient because it is not necessary to disclose all potential spending conditions when funds are spent (which translates to lower fees), and it is more private because such transactions are better combined with other transactions. (As a notable example, Lightning channel closing transactions can be made to look like regular payments.)
Main root activation
In the past, activating updates on the Bitcoin network has sometimes proved difficult. The activation process for Segregated Witness, in particular, became something of a battlefield, where (some) miners refused to activate the update, until (some) users presented them with a somewhat controversial ultimatum in the form of a soft fork. User Activated (UASF), defined in BIP148.
For some time, this controversy seemed to play out in the discussion about the activation of Taproot. Some developers and users argued that a UASF-style trigger should be incorporated into the trigger mechanism from the outset, while other developers and users objected to such a solution as too risky and / or aggressive.
Eventually, a compromise was found between the two main fields in the form of a “Quick Test” (although some proponents of an embedded UASF still released their own client). The Speedy Trial trigger mechanism would give miners three months to signal support for the Taproot update. If miners indicated support for the upgrade on 90% of all blocks within a single two-week difficulty period (1,815 or more 2,016 blocks), Taproot would activate on block 709,632, which is estimated to be mined in November.
Marking block number 1815 from this two-week difficulty period (the third difficulty period since the Speedy Trial signaling period began) has just been mined. This means that the Bitcoin ecosystem (users, miners, companies, projects) has approximately five months to prepare for the update, updating to compatible software or perhaps taking alternative security precautions.
Since Taproot is a soft fork update and miners have indicated that they are ready for the update, even out-of-date software must still be compliant with Taproot’s rules; this outdated software simply will not enforce or benefit from these new rules.
For more information on what exactly Taproot is, see also this explainer.