Bitcoin Improvement Proposals Schnorr / Taproot and Other Codebase Modifications to Increase Fungibility, Privacy of BTC Transfers

The team at crypto exchange OKCoin recently took a closer look at the three major Bitcoin Improvement Proposals (BIPs) that make up the Bitcoin Core update, Schnorr/Taproot.

As noted by OKCoin, the version 0.21.0 of Bitcoin Core is scheduled to be released early next month (February 2021). With this new release, the code for the Schnorr/Taproot upgrade will be published. It’s considered one the most important Bitcoin codebase updates.

As explained by OKCoin, the upgrade that’s referred to as “Schnorr/Taproot” consists of three main BIPs, new code proposals to enhance Bitcoin Core, the reference client used to run the Bitcoin or BTC protocol. The BIP #340 will add “Schnorr signatures,” the BIP #341 will add “Taproot” and the BIP #342 will aim to add “Tapscript.” As noted by OKCoin, Schnorr signatures and Taproot are “the most consequential parts of this update.”

The crypto firm added:

“Schnorr/Taproot is the culmination of years of work. The idea of Taproot was proposed by Bitcoin developer Gregory Maxwell Taproot in January 2018. Another Bitcoin developer, Pieter Wuille, created the proposal to implement the idea in September 2019. It then went through an extensive review and test phase, with 150 developers participating in a 7 weeks long review process in November 2019. The code is going to be implemented in the next release of Bitcoin Core, in December 2020 — but it doesn’t even mean it will actually be adopted by participants in the Bitcoin network.”

As confirmed by OKCoin, the Taproot proposal has been designed to build on top of Schnorr signatures. The primary function of Schnorr signatures is to facilitate or support “multi-signature” (multisig) transfers, which need several different signatures in order to be completed, and traditional, single signature transactions (referred to as P2PKH, for ‘pay-to-public-key-hash’ transactions), look somewhat the same on a blockchain or distributed ledger technology (DLT) network.

The function or purpose of Taproot is to “extend this approach to other, more complex sorts of transactions (called P2SH, for ‘pay-to-script-hash’ transactions) and also make them look like traditional P2PKH transactions,” the OKCoin team explained.

While going over how this all works, the exchange pointed out that the fundamental or main benefit of Schnorr signatures is that they “allow for key and signature aggregation.” As noted by OKCoin, this means that “it becomes possible to combine different public keys into a new, single one.” For example, let’s say Alice and Bob’s signatures are needed for a multisig payment or transaction made out to John.

Because of Schnorr, it will be possible to “combine Signature A and Signature B into Signature C,” OKCoin noted. They also mentioned that “when Alice and Bob provide their (so-called ‘threshold’) signatures and public keys, only ‘Signature C to John’ will appear on the blockchain.” The transaction will appear as a “traditional single signature transaction from C to John,” OKCoin confirmed.

While discussing what the Schnorr/Taproot update actually changes for the average or typical user, OKCoin noted:

“It increases the fungibility and privacy of Bitcoin. For a currency to be ‘fungible’, all of its individual units need to be indistinguishable from any other unit. The US Dollar is fungible because any individual 1$ bill is worth the exact same. One dollar bill could have been used to pay for illegal drugs, another to fund a wedding, their past use will not change their value: they’re worth the exact same. Currently, because transactions are publicly broadcasted on the blockchain, and because different types of transactions have different digital fingerprints, it is fairly easy to obtain identifying information about specific transactions.” 

As explained by OKCoin, being able to “identify the past use of certain coins can ‘taint’ them and make them less valuable than ‘clean’ coins.” This is actually a major potential threat to Bitcoin’s fungibility and to its prospects of becoming a widely-adopted digital currency.

With the addition of Schnorr signatures and Taproot, all transfers will “appear to be of the same kind on the blockchain.” It basically makes it a lot more difficult to actually know if a particular BTC transaction was a one-to-one payment (like from Alice to Bob) or a more complicated or complex transfer, like with multiple signatures, certain time-dependent conditions, or made via the Lightning network. As noted by OKCoin, this upgrade is “a net fungibility gain.”

The exchange also mentioned:

“Schnorr/Taproot increases the privacy of Bitcoin in a similar way. By analyzing a multisig transaction, one can also identify the specific multisig set-up that was used, the ways the success conditions of a certain smart contract have been met, the type of wallet that was used, etc. Obfuscating this information is a great privacy gain for Bitcoin users.”

(Note: to learn more about this update, check here.)

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