Last Sunday, the first bitcoin upgrade in four years went live on block 709,632, a rare moment of consensus among bitcoiners. There is no doubt that Taproot’s successful activation is a clear accomplishment for the world’s most popular cryptocurrency and its growing community worldwide.
The Taproot upgrade is the most significant change for the bitcoin protocol since the SegWit (Segregated Witness) block capacity change in 2017, which increased the amount of transactions that could fit into a block by pulling data on signatures from bitcoin transactions.
The Taproot upgrade in reality consists of three different upgrade proposals. But the core upgrade introduces a new digital signature scheme called “Schnorr” that enables the cryptocurrency to execute smart contracts.
By reducing the transaction size and making nearly all transactions appear like a simple, single-signature one, Taproot will enable larger, more complex operations to be deployed on the bitcoin network. In summary, Taproot was designed to improve bitcoin’s efficiency, privacy and security and I think it will do just that over time.
The run-up to Taproot’s activation, in part, spurred a bitcoin rally, launching bitcoin’s price to an all-time-high of $69,000 on November 10th 2021, demonstrating the excitement fueling the latest major upgrade.Although we are currently going through a minor correction, the Taproot upgrade will have a positive and lasting impact on the protocol for years to come.
Improvements in security
For people that enjoy their privacy, the Taproot upgrade will be of interest to them. In addition to helping facilitate smart contracts over bitcoin’s blockchain, the upgrade will also increase privacy for certain kinds of transactions because Schnoor signatures will enable for multi-signature transactions.
These transactions, which involve multiple addresses, will now appear as a single transaction, giving those involved greater privacy and anonymity. Although this is a huge benefit, I have heard that some people are worried that it may cause more government concern over bitcoin and illegal activities such as money laundering and tax evasion. But I think this is unlikely to happen in the short-term future.
Broader applications for bitcoin
Lower costs and more flexible transactions types are likely to support more development of NFTs and applications in DeFi on the bitcoin protocol, and it could blaze the path for a new phase of technological progress on the first widely-adopted cryptocurrency.
The big game changer in Taproot is now bitcoin can process more smart contracts, similar to what Ethereum does. Bitcoin has historically been much more limited in processing smart contracts compared to Ethereum, but although the original cryptocurrency won’t ever be as flexible as Ethereum from a smart-contract perspective, the Taproot upgrade will help narrow the gap. All this means that we are much more likely to see an increase in day-to-day applications on the bitcoin protocol over time.
Taproot unleashes the Lighting Network’s power
Taproot will help unleash the Lightning Network’s potential as a scaling technology for bitcoin. The new upgrade will make transactions on the Lightning Network much cheaper, more private and more flexible. The Lighting Network is a layer 2 solution that enables faster payments and a way to scale the technology to meet the rising demand in transactions.
Since there will be less data involved in each transaction, they will become more energy efficient, making them cheaper to process, which will result in lower transaction fees. This is clearly good for people who use bitcoin frequently to make payments, and it should help accelerate adoption of bitcoin.
A significant step forward
With all of the above, Taproot is the most meaningful upgrade to the bitcoin network since 2017 when the block size increased, and the bitcoin community should be proud of finally getting this over the finish line.
Making any changes to bitcoin is hard. But the infrequency of its upgrades demonstrates that it is robust and already resilient . Or in other words, it’s here to stay.
There is no one person in charge of the entire bitcoin network who can make changes by themselves on their own authority – changes require consensus on the protocol, like a Dao. And acquiring a consensus among a diverse group is incredibly challenging. The success of the Taproot upgrade is a clear indicator that the dispersed group of bitcoiners can come together and make major positive and lasting changes to the network.
What does it mean for bitcoin investors?
There is still a long way to go before Taproot’s complete potential is seen. But historically these large scale upgrades have set the stage for the next phase of innovation in the bitcoin protocol. The last major upgrade in 2017 helped create the Lightning Network, enabling instant payments across a network of participants.
Therefore, I expect the Taproot upgrade to allow the development of another wave of technologies for the bitcoin network. This would in turn result in more adoption of bitcoin, and thus, increasing its value with it over time. But keep in mind that past performance does not predict future results.