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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. One of the most significant changes of this upgrade is that it improves transaction privacy and efficiency and unlocks the potential for smart contracts. 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.

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.

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. Although Taproot will make bitcoin smart contracts more viable and narrow the gap with Ethereum, I don’t expect we will see a huge rise in dApps or DAOs on bitcoin in the near term. Instead, we’ll probably see simple bitcoin smart contracts used for things like insurance payouts, residential real estate transactions, or financial annuity products.

Cheaper
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 both the natural and necessary next step in making bitcoin competitive in the long run. It’s unclear if the upgrade has already been included in the present price and all-time high we witnessed last week or whether it will result in even bigger price hikes.

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.

Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG.

Ilias Louis Hatzis is the founder and CEO at Kryptonio wallet. Create your wallet in less than a minute, without seed phrases, private keys, passwords or documents. Keep your bitcoin and digital assets always secure and recoverable: https://kryptonio.com

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.