On November 14, Bitcoin went through a major upgrade known as Taproot. It will allow the blockchain to carry out complex transactions. This can expand the possible applications of Bitcoin and improve its smart contract functionality making it more competitive with Ethereum.
This enhancement represents the biggest change in the Bitcoin protocol since the SegWit block size was increased in 2017. It helped to raise the number of transactions that are included in each block by separating transaction signature data.
According to Noelle Acheson, head of market insights at Genesis, the leader in digital currency prime brokerage, Taproot will broaden the potential applications of Bitcoin.
“More flexible transaction types and lower costs are likely to support more development of DeFi (decentralized finance) and NFTs (non-fungible tokens) on bitcoin, and could set the stage for a wave of technological progress on the original crypto network,” she commented.
Taproot is a collection of three upgrade proposals. Most importantly, it will introduce a new digital signature algorithm known as “Schnorr” that will improve the efficiency and privacy of Bitcoin transactions. Schnorr can also be implemented by users to carry out complex smart contracts.
The Taproot upgrade was officially activated on Sunday, November 14, on block 709,632.
The preparation for Taproot’s activation has stimulated the price of Bitcoin which reached the record value of $69,000 on November 10. In the last two months, Bitcoin has grown by approximately 47%.
According to market participants, the discussions of the Taproot upgrade began in 2016. The upgrade became part of the Bitcoin software in September.
The most important innovation is that Bitcoin’s blockchain will be able to process more smart contracts, like Ethereum.
According to Katherine Dowling, General Counsel and COO at crypto investment company Bitwise, Bitcoin was previously lagging behind Ethereum in processing smart contracts.
“But, while Bitcoin likely won’t ever be as flexible as Ethereum from a smart-contract standpoint, with Taproot that gap will now narrow. And that means we’ll likely see an increase in day-to-day applications for Bitcoin,” she said.
Taproot will improve privacy by hiding the type of transaction. The Schnorr signatures will allow the Bitcoin protocol to execute more complex transactions. For example, it will enable transfers from wallets that need multiple signatures. This will improve the confidentiality and security of transactions.
Another benefit is the improved data efficiency of transactions due to the optimized block size and lower transaction fees. These important upgrades have laid the foundation for further Bitcoin network innovation. The previous significant upgrade took place in 2017 and helped to launch the Lightning network, which improved the speed and cost efficiency of Bitcoin payment transactions. Taproot is expected to spark a new wave of Bitcoin innovation which will be focused on smart contracts.