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A major upgrade to bitcoin just activated — here’s what investors should know.

On Sunday, at block 709,632, Taproot, a highly -anticipated upgrade to bitcoin, went into effect.

This is bitcoin's first major upgrade since 2017, and it will have a number of implications for the blockchain.

Taproot will implement Schnorr signatures, which will make bitcoin transactions more secure, efficient, and cost-effective. Above all, the upgrade will improve bitcoin's ability to execute smart contracts on the blockchain.

Though some experts believe Taproot will have a minor impact on bitcoin's price, investors should be aware of the implications of the upgrade. After all, it's hard to anticipate an asset's future price, and bitcoin is the blockchain that powers the world's most valuable cryptocurrency.

What you need to know about Taproot's upgrading?

The Taproot upgrade is a collection of three independent upgrade proposals, each with its own set of benefits, Katherine Dowling, general counsel and chief compliance officer at Bitwise Asset Management.

Smart contracts

The most significant change from Taproot is the potential of smart contracts, Dowling says.

"Schnorr signatures can be used to enable bitcoin users to execute more complex smart contracts than bitcoin can currently," she explains. "This is significant since one of the fundamental differences between bitcoin and other blockchains like Ethereum is their applicability for smart contracts," says the author.

Smart contracts are code-based digital agreements that are stored on the blockchain. They're crucial in applications like decentralised finance (DeFi) and nonfungible tokens (NFTs), for example. Ethereum's smart contract features have contributed to its status as the most widely utilised blockchain.

"Bitcoin has historically been far more constrained in accommodating smart contracts," she argues, compared to Ethereum. "However, while bitcoin will never be as versatile as Ethereum in terms of smart contracts, the gap will now be narrowed thanks to Taproot."

This will almost certainly lead to an increase in bitcoin applications on a daily basis.

Privacy

The Taproot upgrade aims to make certain transactions more private.To accomplish this, Schnorr signatures will eventually enable multi-signature transactions, or those involving many addresses, to appear as a single, conventional transaction. Smart contracts, among other things, are frequently enabled via multi-signature transactions.

As a result, multi-signature transactions will be indistinguishable from basic transactions, giving addresses involved in multi-signature transactions better anonymity and privacy.

Though Dowling characterises this as a "significant plus," some fear that it would increase government worry about bitcoin and criminal activities like tax evasion and money laundering.

Cheaper transactions

Schnorr signatures would also cut down on the amount of data required for multi-signature transactions, which are more difficult to process than ordinary transactions.

"Transactions will become more energy and time efficient with less data required," says Tyrone Ross, CEO of Onramp Invest, a firm that assists advisors with digital asset management.

As a result, transaction processing will be less expensive, resulting in decreased transaction costs.

Looking forward

Taproot will "provide the groundwork for the next phase of bitcoin protocol evolution," according to Dowling. "We expect this upgrade to usher forth a new era of bitcoin innovation, centred mostly on smart contracts."

Despite Dowling's bullishness, it's vital to keep in mind that all cryptocurrencies carry risks due to their volatile and speculative character. Investors should only invest what they can afford to lose, according to financial experts.