This week, the long anticipated Taproot upgrade was launched on the Bitcoin core protocol, making it the first major upgrade by consensus since Segregated Witness was integrated in 2017.
But what exactly does the Taproot upgrade enable for the first ever cryptocurrency, and what might this mean for the future of the financial technology in general? Here is everything you need to know about this major change for the Bitcoin protocol.
Bitcoin And The Blockchain Technology It Was Built On
When Bitcoin was first introduced to the world by the mysterious person or group called Satoshi Nakamoto, it was the first working instance of a decentralized cryptocurrency built on a distributed ledger called blockchain.
The early design sought to focus on security and robustness of the network over speed and function. Bitcoin is often criticized due to how slow transactions can take to process, which is roughly ten minutes per block.
As soon as other developers were able to, they began designing solutions that can send significantly more transactions per second, and a much faster block clearing time. Today, cryptocurrencies claim thousands of transactions per second.
Bitcoin also relies on a proof-of-work algorithm for mining, which is a lot more energy intensive than newer, greener, proof-of-stake coins. Environmental impact is becoming a bigger deal across the industry as regulators get involved in putting parameters in place around the market.
One of the more impactful developments over the last several years, was the introduction of Ethereum and the smart contracts the platform offers. Smart contracts are executable code that act as an agreement between two parties and can be coded to operate in a variety of ways. Smart contracts can run programs like decentralized apps, or be used to mint NFT tokens and more – depending on what token standard is being used.
The emergence of smart contracts, the explosion of DeFi, and more have made Ethereum a serious contender to Bitcoin’s throne. But as Ethereum itself grows, it is also experiencing bottlenecks, prompting several more cryptocurrency projects to boast about their speed and scaling prowess.
But while this all happens, Bitcoin is getting an upgrade that will allow smart contract functionality on its blockchain. That upgrade is called Taproot, and that’s not all it brings with it – which we will begin to review next.
What The Taproot Upgrade Means For Bitcoin
The Taproot upgrade will bolster transaction privacy and efficiency. The Taproot upgrade will introduce the usage of Schnorr signatures, which allows more advanced Bitcoin transactions to be made. Schnorr signatures are faster and smaller than linear signatures. Because of this structure, transactions from multisig wallets will appear the same as other transactions, helping to provide an additional layer of privacy to all parties.
The design is also the foundation for smart contract functionality, making it so users won’t have to rely on third parties or other blockchains like Ethereum to tokenize Bitcoin for usage within DeFi applications and more. What’s interesting, is that even though the upgrade was launched, it will take a long time before it is widely adopted.
For example, Bitcoin’s last major upgrade, dubbed SegWit, took nearly two full years to reach 50% adoption levels. Given the increased rate of participation in the Bitcoin network, Taproot could see faster adoption. Taproot also enjoys near universal support from developers, a rare win for the Bitcoin community that has been fragmented in the past over disagreements.
Past disagreements have led to forks in the Bitcoin core code. These efforts are also meant to speed up Bitcoin transactions, lower fees, and address scalability. Blockchain industry execs call the Taproot upgrade “a breadth of opportunity for entrepreneurs interested in expanding bitcoin’s utility.”
Fred Thiel, CEO of Marathon Digital Holdings says that smart contracts are the “primary driver of innovation on the Ethereum network, and “essentially give you the opportunity to really build applications and businesses on the blockchain.”
The Taproot upgrade has been a long time in the making, because the code needs ample testing, or there is risk of harming the integrity of the Bitcoin blockchain. Such a situation could “destroy confidence in the whole cryptocurrency system,” according to Jason Deane, an analyst for Quantum Economics. “You don’t want different clients or miners in the protocol out of sync. That’s how catastrophic stuff happens,” added Nic Carter, of Castle Island Ventures.
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Anticipation of the upgrade caused Bitcoin price to rise to $66,000, but was promptly followed by a sharp selloff back to below $60,000 when the upgrade went live. The event might have been a short-term buy the rumor, sell the news event, so to speak. Investors and traders that were eager to profit from the market’s reaction to the new upgrade might have been used as a bull trap instead.
If $60,000 can hold, with the Taproot upgrade now here, and smart contracts are coming to Bitcoin, it could take a serious bite out of Ethereum’s dominance around DeFi, and make all those so-called Ethereum killers obsolete. Bitcoin having this additional layer of business utility could attract entrepreneurs and developers to the number one cryptocurrency’s ecosystem in droves.
Even if the Taproot upgrade did lead to some temporary market volatility and a pullback, the positive impact on the cryptocurrency community for the long-term is worth the short-term pain. If volatility continues in the meantime, be sure to look into how to trade Bitcoin. The Taproot upgrade is a reminder the cryptocurrencies are still speculative assets, and make for outstanding opportunities for margin trading.
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