What it means for investors
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Just recently, the first Bitcoin upgrade in 4 years went live. This is an unusual moment when all stakeholders come to an agreement, which is huge for the most widely used cryptocurrency in the world.
The Taproot update means greater transaction privacy and efficiency – and crucially, it will unlock the potential for smart contracts, which can be used to eliminate middlemen from transactions.
Alyse Kileen, co-founder and managing partner of Stillmark’s bitcoin-focused venture capital firm, said, “Taproot is important, because entrepreneurs have many opportunities to expand bitcoin’s utility.”
Unlike bitcoin’s 2017 upgrade – referred to as the “last civil war” because of the contentious ideological divide separating adherents – Taproot has near universal support, in part because these changes involve fairly incremental improvements to the code.
Changes
Digital signatures are a big part of the transformation to bitcoin. They act as a fingerprint that an individual leaves with each transaction.
The current cryptocurrency use an “Elliptic Curve Digital Signature Algorithm” which generates a signature with the private keys that control bitcoin wallets. This ensures that the bitcoin can only ever be used by its rightful owners.
Taproot will now add Schnorr Signatures to make multisignature transactions inaccessible, according Alejandro De La Torre (a bitcoin miner).
While it won’t give you more anonymity on your bitcoin address, however, simple transactions will be indistinguishable by complex or multisignature transactions.
This means that your keys will not be as visible on the chain, which in practice is a greater level of privacy. “You can kind of hide who you are a little bit better, which is good,” said bitcoin mining engineer Brandon Arvanaghi, who now runs Meow, a company that enables corporate treasury participation in crypto markets.
Smart contracts
This is also an advantage for smart contracts which can be self-executing and live on the Blockchain. A smart contract could be used for almost every type of transaction, including paying your rent monthly or registration your vehicle.
Taproot makes smart contracts smaller and cheaper by reducing the amount of space that they take up in the blockchain. Killeen claims that the enhanced functionality and efficiency of Taproot offers “mind-blowing potential.”
Smart contracts can currently be created on either bitcoin’s core protocol or on the Lightning Network. The Lightning Network is a payment platform that uses bitcoin and allows instant transactions. Lightning Network Smart contracts typically result in faster, more affordable transactions.
Killeen explained that light transactions are often fractions of cents, while transactions at the core protocol layer may be more costly.
Lightning was already being developed by developers in preparation for the upgrade. It will now allow highly customized contracts.
“The most important thing for Taproot is…smart contracts,” said Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings. It’s the main driver of innovation in the Ethereum network. The smart contract essentially gives you the chance to build real applications on blockchain.
Bitcoin could be a more prominent player in DeFi (decentralized finance), as more programmer build smart contracts on bitcoin’s blockchain. This term refers to financial apps that are designed to eliminate the middleman.
Today, ethereum reigns supreme as the top blockchain choice for these applications, commonly referred to simply as “dApps.”
The wait is worth it
While the bitcoin community was able to agree to the upgrade in June and November, rollout actually took place in November. This delay of a couple months was intended to allow enough time for testing, and reduce the chance that something will go wrong with the upgrade.
“Upgrades allow the – extremely remote – possibility of a bug entering the system, which would destroy confidence in the whole cryptocurrency system, effectively wiping it out – a ‘self-inflicted wound’ if you like,” said Jason Deane, an analyst at Quantum Economics.
Deane believes this is the reason why upgrades are carefully tested and retested over long periods.
Many community members also recall the 2013 disastrous upgrade that resulted temporarily in Bitcoin being split in half.
“You do not want the protocols to have different miners or clients. That’s how catastrophic stuff happens,” Nic Carter, founding partner at Castle Island Ventures, told CNBC. These lead times are necessary because we do not want 2013 to happen again.
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