Taproot is here. The next era of bitcoin just began.

The Taproot upgrade for Bitcoin was officially activated on Sunday. Bitcoin had its biggest upgrade in 4 years, since the introduction of Segregated Witness in 2017. The Taproot upgrade improves network privacy, scalability, security, and the ability to support complex transactions. Earlier in the week bitcoin hit a new record high of $69k ($68,789.63 to be exact), and the Taproot upgrade will have a substantial impact on bitcoin’s future growth and usage and will increase its adoption rate dramatically. A new era for bitcoin has just started. While changes will not be apparent to users immediately, the enhanced features will provide developers, crypto wallets, and exchanges with more tools to improve the bitcoin network’s capabilities over time.

Ilias Louis Hatzis is the founder and CEO at Kryptonio wallet. Please participate in our Crypto Wallet Survey, we could use your help. It’s seven simple multiple-choice questions about crypto wallets and you should be done in 60 seconds. The survey is completely anonymous.

Back in 2017 you might remember SegWit which was the last big update to the bitcoin network, helping the network scale and pave the way for the Lightning Network.

The launch of Taproot is huge news.

Taproot has set the stage for some important functionality on the bitcoin network. In summary, it brings three crucial improvements to bitcoin: makes transactions even less traceable; makes bitcoin programmable; and reduces the cost of sending bitcoin, by reducing the data transferred per transaction.

Improved Privacy
Taproot’s privacy ramifications are likely the most significant aspect of the upgrade. Bitcoin transactions can be complex and today anyone can detect complex transactions that require the creation of multiple transactions. With Taproot all the moving parts of a bitcoin transaction become invisible.

One of the important changes to the network, with the Taproot, is the shift from Elliptic Curve Digital Signature Algorithm (ECDSA) to Schnorr Signature Algorithm (SSA).

With ECDSA a signature is created from the private key that controls a bitcoin wallet and ensures that bitcoin can only be spent by the rightful owner. With SSA all transactions will become indistinguishable, and complex transactions will look like simple transactions. In practice, this means greater privacy.

Potential spending conditions of the funds will not be revealed whenever funds are moved and SSA makes all transaction outputs look the same, so no one can tell if multi-signature is used or not. Spending bitcoin using Taproot would make a transaction in a Lightning Network channel, a peer-to-peer transaction, or a sophisticated smart contract identical.

Smart Contracts
Taproot introduces a new scripting language and makes bitcoin much more programmable. Building additional technology solutions on top of bitcoin potentially just became easier.

Smart contracts are the primary driver of innovation on the Ethereum network. As more programmers build smart contracts on top of bitcoin’s blockchain, bitcoin could become important for decentralized finance.

Although Taproot will make bitcoin smart contracts more viable and narrow the gap with Ethereum, I don’t expect we’ll see a surge in dApps or DAOs on bitcoin in the short term and for now, we’ll probably see simple bitcoin smart contracts used to automate payments.

Cheaper transactions
The Taproot update was designed with one goal in mind: to make Bitcoin transactions smaller. Since less data is stored on the blockchain, the whole network becomes more efficient, and every transaction becomes faster and cheaper. Because Schnorr signatures require less data, Taproot may increase the average number of transactions per block, resulting in lower transaction fees, especially for complex multi-signature or time-locked transactions.

Conclusion
While the impact of Taproot may not be as meaningful at first, the true advantages of the Taproot upgrade lie with the Lightning Network. Taproot is expected to make the Lightning Network much more scalable, which can potentially make bitcoin more useful as a payment method, and not just a long-term store of value.

Taproot is a natural and necessary next step in making bitcoin competitive in the long run. I am not sure if we’re already seeing the upgrade’s positive effects on the price or if it will trigger even bigger price hikes, surpassing last week’s new all-time high, but PlanB’s S2F model is predicting that bitcoin will hit $98K in November and $135K in December.

One thing is certain: Taproot makes bitcoin’s network more robust, simplifies complicated transactions, and improves privacy and scalability. While bitcoin won’t be able to compete with the speeds of Solana or Ethereum 2.0, it will become much easier for developers to continue to upgrade the network, and even build decentralized finance functionality. This is an exciting time in the history of bitcoin and if Taproot is successful, it will show that bitcoin can adapt.

Image Source

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research.

Start the conversation at Daily Fintech Conversations