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Introduction
When Satoshi Nakamoto launched Bitcoin in 2009, no one imagined just how big and complex it would become. What began as a simple peer-to-peer payment system has evolved into a powerful global network, thanks in part to two major upgrades: Native SegWit and Taproot.
These changes fundamentally reshape how Bitcoin handles transactions, privacy, and even smart contracts. If you've ever wondered why fees spike, why some transactions are slower, or what Bitcoin is capable of beyond payments, understanding these upgrades is key.
In this guide, we’ll break down Native SegWit and Taproot and go through what they do, how they differ, and when to use each, so you can see where Bitcoin is headed and why it matters.
The Scalability Problem
Before we get into solutions, let’s talk about the problem.
Bitcoin was designed with strict limits: a 1MB block size and 10-minute intervals between blocks. This keeps the network decentralized and secure, but it also caps the system at around 7 transactions per second. Compare that to Visa’s 65,000, and you start to see the issue.
As Bitcoin gained users, the network got overwhelmed. Fees spiked above $50. Confirmations lagged. Transactions stalled for hours, sometimes days.
Bitcoin needed to scale, but without sacrificing its core principles. That’s where Native SegWit and Taproot come in: upgrades that boost efficiency, lower fees, and unlock new possibilities without changing what makes Bitcoin, Bitcoin.
Native SegWit: The Efficiency Revolution
What is Native SegWit?
Native SegWit, short for Native Segregated Witness, is the upgraded version of the original SegWit soft fork activated in 2017. While the original SegWit improved Bitcoin’s scalability, Native SegWit took it a step further by making transactions even more efficient.
The key idea? It separates the signature data (called the witness) from the main part of the transaction. This might sound minor, but it frees up space so more transactions can fit into each block.
Native SegWit addresses are easy to spot as they start with “bc1q”, unlike older addresses that begin with “1” or “3”. The format is safer, with better typo protection and easier readability.
How It Works
Bitcoin doesn’t just measure blocks in bytes anymore, it uses a "weight" system. Native SegWit takes advantage of this by giving the witness data a lower weight. That means transactions using Native SegWit are effectively smaller and cheaper, even if the actual byte size isn’t dramatically different.
In practice, Native SegWit transactions use up to 40–50% less block space than legacy ones. That translates into lower fees and faster confirmations, especially when the network is busy.
Why It Matters
Here’s what makes Native SegWit a big deal:
Lower fees: Users typically save 20-40% on fees compared to older formats.
Faster confirmations: More transactions fit into each block, so you’re less likely to get stuck waiting.
Fewer mistakes: The new address format includes better checksums, reducing the risk of losing coins to a bad copy-paste.
Unlocks Lightning: By fixing transaction malleability, Native SegWit made fast, off-chain solutions like the Lightning Network possible.
Real-World Impact
Adoption has skyrocketed, from under 1% of transactions at launch to over 85% by 2024. Exchanges and wallets that switched to Native SegWit report major savings, sometimes hundreds of thousands of dollars a year in reduced fees.
And all of this happened without a hard fork or compromising Bitcoin’s decentralized design. Just smarter use of space.
Taproot: The Privacy and Smart Contract Game-Changer
What is Taproot?
If Native SegWit was about efficiency, Taproot is about unlocking Bitcoin’s potential for privacy and smart contracts. Activated in November 2021, Taproot was the biggest upgrade since SegWit, and one of the most anticipated in Bitcoin’s history.
The idea started back in 2018, when developer Gregory Maxwell proposed a way to make complex Bitcoin transactions more private and efficient. After years of review, testing, and community debate, over 90% of miners signaled support in mid-2021, and the upgrade went live at block 709,632.
Taproot isn’t just one change, it’s actually a bundle of three key upgrades:
BIP 340 - Schnorr Signatures: A more efficient and flexible replacement for Bitcoin’s old signature system.
BIP 341 - Taproot: Introduces MAST (Merkelized Abstract Syntax Trees) for smarter, more private contract logic.
BIP 342 - Tapscript: A new scripting language that supports all the above while allowing future upgrades.
Core Technologies Behind Taproot
Schnorr Signatures: Simpler, Smarter, More Private
Schnorr signatures are a major leap forward. Unlike the old ECDSA system, Schnorr lets multiple signatures be combined into one. So instead of broadcasting three separate signatures for a multi-signature wallet, you only publish one.
That saves space, lowers fees, and hides the complexity of the transaction. From the outside, it just looks like a regular Bitcoin payment.
MAST: Smarter Smart Contracts
Taproot's core idea is MAST: instead of showing all possible spending conditions in a contract, you only reveal the one that was actually used. That means more privacy and less clutter on the blockchain.
For example, in a 3-way escrow deal with multiple outcomes, only the chosen path appears publicly, making complex contracts more private and more efficient.
Tapscript: Future-Proofing Bitcoin
Tapscript updates Bitcoin’s scripting language so it can handle all the new features introduced by Taproot and Schnorr. It also makes it easier to add new features in the future without needing another major upgrade.
Why Taproot Matters
Taproot improves Bitcoin in two big ways:
Better Privacy: Multi-signature and smart contract transactions now look just like simple payments. This helps protect user privacy and improves fungibility, meaning all bitcoins become more equal in the eyes of the network.
Smarter Contracts: Taproot lays the groundwork for more advanced Bitcoin applications. Think atomic swaps, payment channels, and complex multi-party agreements, all with less data, lower fees, and more privacy.
For businesses, this is huge. A company running complex payrolls or escrow services can now do so without broadcasting every rule of the transaction to the world. For users, it means a stronger, more private Bitcoin without giving up security or decentralization.
Head-to-Head Comparison: Native SegWit vs Taproot
Both Native SegWit and Taproot push Bitcoin forward but in different ways. Here’s how they stack up side by side.
Efficiency and Performance
Native SegWit is the clear winner for simple, everyday transactions. It trims off 40–50% of the block weight compared to legacy formats, so your transactions are lighter, cheaper, and confirm faster. The efficiency gains are consistent and reliable.
Taproot, on the other hand, shines when things get complicated. For basic payments, its efficiency is similar—sometimes even slightly less optimal than Native SegWit. But once you start using multi-signature setups or smart contracts, Taproot pulls ahead. A complex 3-of-5 multi-sig, for example, can be about 30% smaller with Taproot.
Bottom line:
Simple transactions? Go with Native SegWit.
Complex transactions? Taproot scales better the more complexity you add.
Transaction Costs
For most users, Native SegWit offers the best bang for your buck. It’s cheaper than legacy, widely supported, and ideal for peer-to-peer payments or regular BTC withdrawals.
Taproot can actually cost slightly more for simple use cases, due to its added overhead. But that flips when you factor in complexity. Taproot’s ability to combine multiple signatures and hide unused contract logic results in big fee savings for multi-party or programmable transactions.
Rule of thumb:
Native SegWit = better for basic payments.
Taproot = better for smart contracts, multisig, and advanced use cases.
Privacy Features
Here’s where Taproot really stands out.
Native SegWit doesn’t change anything about how private your transactions are. You still benefit from Bitcoin’s pseudonymous design, but that’s about it.
Taproot makes complex transactions look just like any other. Whether you’re using a smart contract, multi-sig wallet, or just sending BTC, they all blend together on-chain. That helps improve fungibility—the idea that one bitcoin is as good as any other, no matter its history.
So even if you don’t need the extra privacy yourself, you still benefit from being part of a larger, more uniform anonymity set.
Privacy verdict:
Native SegWit = efficient, but transparent.
Taproot = privacy boost, especially for complex use cases.
Smart Contract Capabilities
Native SegWit opened the door to smart contracts mainly by fixing a key issue: transaction malleability. This made tools like the Lightning Network possible, but it didn’t add much to Bitcoin’s scripting itself.
Taproot takes it much further. With Schnorr signatures, MAST, and Tapscript, Taproot allows more flexible and private contracts. Think: time-locked transactions, escrow logic, multi-party deals, atomic swaps—and all of it more efficient and harder to fingerprint on-chain.
While Bitcoin still won’t match Ethereum’s programmability, Taproot lets it compete where it matters: simple, secure contracts with minimal trust and maximum privacy.
Smart contract summary:
Native SegWit = good for Lightning.
Taproot = full smart contract upgrade, still Bitcoin-simple.
Technical Deep Dive: Address Formats and Usage
Bitcoin has evolved through several address formats, each one bringing new features, optimizations, and use cases. Here's a quick breakdown:
Legacy (starts with “1”)
The original format. Works everywhere, but comes with the highest fees and no efficiency perks.
Wrapped SegWit (starts with “3”)
The first version of SegWit, wrapped inside a Pay-to-Script-Hash structure. Better than legacy, but not as efficient as newer formats.
Native SegWit (starts with “bc1q”)
The modern standard for most users. Lightweight, fast, and cost-effective. Perfect for simple payments and Lightning Network transactions.
Taproot (starts with ”bc1p”)
The most advanced format. Designed for smart contracts and privacy-enhanced transactions. Ideal for users who want future-proof features.
The best part is that all address types are interoperable. You can send BTC from a legacy address to a Taproot address or vice versa without issue. But for maximum efficiency, both sender and receiver should be using modern formats like Native SegWit or Taproot.
Best Practices for Users
Choosing the right address format depends on what you're doing with your Bitcoin. Here’s a simple guide:
Sending or receiving BTC regularly?
Use Native SegWit (”bc1q”)—it’s fast, cheap, and widely supported.
Want more privacy or planning to use smart contracts?
Go with Taproot (”bc1p”)—it offers better anonymity and supports advanced features.
Running a Lightning node or using Layer 2?
You’ll likely need Native SegWit for full compatibility.
Looking for broadest compatibility?
Stick with Legacy (”1”), but be prepared to pay more in fees.
Real-World Applications and Use Cases
When Native SegWit Shines
Native SegWit is perfect for users and businesses focused on efficiency.
Crypto exchanges use Native SegWit to cut down fees on mass withdrawals. This saves hundreds of thousands annually in network costs.
Payment processors benefit from faster confirmations and reduced costs, improving both customer experience and profitability.
Everyday users sending BTC to friends, buying online, or making recurring payments get consistent savings, especially when the network is busy.
Lightning Network users rely on Native SegWit. Without it, many of Bitcoin’s Layer 2 tools wouldn’t work.
In short: if your use case is frequent, simple, or high-volume, Native SegWit is your go-to.
When Taproot Is the Right Fit
Taproot is built for complexity, privacy, and future-facing applications.
Multi-signature wallets used by corporations, exchanges, and security-conscious users become cheaper and more private under Taproot. From the outside, they look like any other transaction.
Privacy-focused users enjoy Taproot’s stealth. By blending in with standard transactions, Taproot makes it harder for surveillance tools to track activity.
Advanced financial tools and protocols like atomic swaps, payment pools, and emerging DeFi features are beginning to tap into Taproot’s smart contract capabilities.
As Bitcoin’s scripting and smart contract landscape expands, Taproot will be the foundation.
Practical Guide: How to Use Each Upgrade
Wallet Setup and Configuration
Most modern Bitcoin wallets support both Native SegWit and Taproot addresses. When setting up a new wallet, look for options to create "bc1" addresses for optimal efficiency and compatibility.
Hardware wallets also typically support both address types, with newer firmware versions enabling Taproot functionality.
Transaction Best Practices
To maximize benefits from these upgrades, follow these guidelines:
For cost optimization: Use Native SegWit addresses for both sending and receiving. Even if your counterparty uses a legacy address, you'll still receive partial benefits.
For privacy enhancement: Consider using Taproot addresses, especially for larger or more sensitive transactions. The privacy benefits increase as more users adopt Taproot.
For complex transactions: Taproot is essential for multi-signature arrangements, time-locked payments, and other advanced use cases.
Avoid common pitfalls: Don't mix address types unnecessarily, always double-check address formats before sending, and ensure your wallet software supports your chosen address type.
Conclusion
Native SegWit and Taproot showcase Bitcoin's evolution from a simple payment system to a comprehensive financial infrastructure. Native SegWit delivers consistent efficiency gains with lower fees and faster confirmations, making it ideal for everyday transactions. Taproot enhances privacy and enables sophisticated smart contracts while maintaining Bitcoin's core principles.
For most users today, Native SegWit offers the best balance of cost savings and compatibility. However, as privacy becomes increasingly important and Bitcoin applications grow more complex, Taproot's advanced capabilities will become essential.
Both upgrades demonstrate Bitcoin's ability to adapt and evolve through careful, consensus-driven development, proving that the network can address scalability and functionality challenges without compromising its revolutionary foundation.
Frequently Asked Questions
Q: Are transactions between different address types compatible on the Bitcoin network?
A: Yes, Bitcoin maintains full compatibility between all address types. You can send bitcoins from a legacy address to a Taproot address, or any other combination, without issues. However, you'll maximize efficiency benefits when both sending and receiving addresses use newer formats like Native SegWit or Taproot.
Q: Which address type should I use for regular Bitcoin transactions?
A: For most users making regular payments, Native SegWit addresses (bc1q...) offer the best combination of low fees, fast confirmations, and broad compatibility. They're supported by virtually all modern wallets and exchanges while providing consistent cost savings.
Q: How much can I save by using Native SegWit instead of legacy addresses?
A: Native SegWit typically reduces transaction fees by ~20% compared to legacy addresses. During periods of network congestion, savings can be even more substantial. The exact amount depends on transaction complexity and current network conditions.
Q: Is Taproot worth using if I only make simple Bitcoin payments?
A: For simple payments, Native SegWit usually offers better cost efficiency than Taproot. However, Taproot provides privacy benefits that can be valuable even for simple transactions. If privacy is important to you, the slight cost premium may be worthwhile.
Q: Do I need to do anything special to upgrade my existing Bitcoin addresses?
A: You don't need to "upgrade" existing addresses, but you can generate new addresses in newer formats through your wallet. Most wallets allow you to create Native SegWit or Taproot addresses alongside your existing addresses. You can then gradually transition to using the newer formats for better efficiency.
Q: Can I use Lightning Network with Taproot addresses?
A: Yes, Taproot addresses are compatible with the Lightning Network. However, Native SegWit addresses remain the most common choice for Lightning Network channels due to their optimal balance of efficiency and compatibility.
Q: How do I know if my wallet supports Taproot?
A: Look for the ability to generate addresses starting with "bc1p" in your wallet settings. Most major wallets released updates supporting Taproot throughout 2022-2024. Check your wallet's documentation or settings menu for Taproot support information.
About Arch
Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services, powered by BitGo.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.