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Why Bitcoin’s new Taproot update is a game changer for investors

Bitcoin underwent a major upgrade on 14 November, enabling it to execute complex operations, such as smart contracts, more seamlessly.

The development, a first in four years, brings the oldest cryptocurrency in closer competition to Ethereum and widens its use cases.

What is Taproot?

Bitcoin
Image credit: Jievani Weerasinghe/@jievani/Unsplash

It includes Schnorr, a new digital signature scheme which is designed to make Bitcoins more secure and efficient. Privacy is ensured by not divulging details of the nature of transactions and making multi-signature transactions unreadable. This basically means that complex transactions such as those requiring multiple signatures can be made to appear like normal transactions on the Bitcoin protocol via the Schnorr digital signature.

As a result, users can gain greater privacy since keys are not exposed on the blockchain as much as they previously did in transactions requiring multiple signatures.

“Taproot matters, because it opens a breadth of opportunity for entrepreneurs interested in expanding bitcoin’s utility,” Alyse Killeen, founder and managing partner of venture firm Stillmark, told MacKenzie Sigalos of CNBC.

Schnorr also helps traders execute complex smart contracts.

What are smart contracts?

Smart Contracts
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Contracts that are self-executing in nature are called smart contracts. These are programmes in which an agreement between two parties is fed directly into the lines of the code. Smart contracts exist on the decentralised blockchain. Transactions can be tracked and are irreversible. An important thing about smart contracts is that they help cut the middleman out from the transactions and give a better opportunity for businesses to build on blockchain.

Ethereum is considered a leader in smart contracts. Taproot enables smart contracts on Bitcoin to become smaller in size and cheaper, thus helping the cryptocurrency close the gap with Ethereum to some degree. Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings, told Sigalos that smart contracts is the most significant thing about Taproot upgrade.

“It’s already the primary driver of innovation on the Ethereum network. Smart contracts essentially give you the opportunity to really build applications and businesses on the blockchain,” said Thiel.

Other Bitcoin upgrades

bitcoin taproot

Taproot is the first upgrade on the Bitcoin protocol since 2017, when SegWit (Segregated Witness) was introduced. Speaking to Reuters, Katherine Dowling, general counsel & chief compliance officer at digital asset investment firm Bitwise, noted that SegWit helped launch the payments platform Lightning Network on Bitcoin.

Currently smart contracts are executed on Lightning Network or on Bitcoin’s core protocol. Contracts on the Lightning Network are faster and cheaper. According to Reuters, the Taproot upgrade has been in talks since 2016. It was expected to be rolled out in June this year but was delayed to allow for more testing to prevent any possibility of an untoward glitch during the upgrade process like the one that affected Bitcoin in 2013.

This article originally appeared on Lifestyle Asia SG.

Manas Sen Gupta
Manas enjoys reading detective fiction and writing about anything that interests him. When not doing either of the two, he checks Instagram for the latest posts by travellers. Winter is his favourite season and he can happily eat a bowl of noodles any time of the day.