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  • November 15, 2021

Bitcoin’s biggest upgrade in four years just happened – here’s what changes.

  • Taproot is the first bitcoin upgrade in four years, and it just activated.
  • The Taproot update implies greater transaction privacy and efficiency – and, more importantly, it will unlock the potential for smart contracts, which can be used to eliminate middlemen in transactions.

The first bitcoin upgrade in four years is now available. It's a rare instance of stakeholder agreement, and it's significant for the world's most popular cryptocurrency.

The Taproot update implies greater transaction privacy and efficiency – and, more importantly, it will unlock the potential for smart contracts, which can be used to eliminate middlemen in transactions.

"Taproot is important because it opens up a lot of doors for entrepreneurs who want to enhance bitcoin's utility," said Alyse Killeen, the founder and managing partner of bitcoin-focused venture firm Stillmark.

Unlike bitcoin's 2017 upgrade, which was dubbed the "final civil war" due to the controversial ideological split that separated supporters, Taproot has nearly universal support, in part because these changes involve fairly incremental improvements to the code.

What’s changing?

Digital signatures, which are similar to the fingerprint an individual leaves on every transaction, are a big element of bitcoin's makeover.

The "Elliptic Curve Digital Signature Algorithm," which makes a signature from the private key that controls a bitcoin wallet and ensures that bitcoin may only be spent by the rightful owner, is currently used by the cryptocurrency.

Taproot will include Schnorr signatures, which effectively render multi-signature transactions unreadable, according to bitcoin miner Alejandro De La Torre.

It won't provide your bitcoin address additional privacy on the public blockchain, but it will make simple transactions indistinguishable from ones that are more complicated and require several signatures.

In practise, this means you'll have more privacy because your keys won't be exposed as much on the chain. "You can kind of cover who you are a little bit better," said Brandon Arvanaghi, a bitcoin mining engineer who now heads Meow, a startup that allows corporate treasuries to participate in crypto marketplaces.

Smart contracts

These improved signatures will benefit smart contracts, which are self-executing agreements that live on the blockchain. Smart contracts could theoretically be used for almost any type of transaction, from monthly rent payments to registering your vehicle.

Taproot reduces the amount of space smart contracts take up on the blockchain, making them cheaper and smaller. Killeen says that this enhanced functionality and efficiency presents "mind-blowing possibilities."

Smart contracts may currently be formed on both bitcoin's core protocol layer and the Lightning Network, a bitcoin-based payments network that allows for instant transactions. Smart contracts implemented on the Lightning Network often result in transactions that are faster and less expensive.

"Lightning transactions can cost fractions of a dime," Killeen noted, "but a bitcoin transaction at the core protocol layer can be far more expensive."In anticipation of the upgrade, which will allow for highly detailed contracts, developers have already begun to build atop Lightning.

"Smart contracts are the most crucial thing for Taproot," said Fred Thiel, CEO of cryptocurrency mining firm Marathon Digital Holdings. "On the Ethereum network, it's already the primary driver of innovation." Smart contracts ultimately allow you to create real-world blockchain applications and enterprises."

Bitcoin could become more of a player in the realm of DeFi, or decentralised finance, as more programmers construct smart contracts on top of bitcoin's blockchain. Decentralized finance is a phrase used to describe financial applications that take out the intermediary.

Today, ethereum reigns supreme as the blockchain of choice for these decentralised apps, commonly known as "dApps."

Why the wait?

Although the bitcoin community agreed to lock in the upgrade in June, it wasn't until November that it was implemented. The two-month delay was intended to allow for testing and to reduce the chances of something going wrong during the update.

"Upgrades allow the – extremely remote – prospect of a bug entering the system, effectively wiping out the entire cryptocurrency system – a'self-inflicted wound,' if you will," said Jason Deane, an analyst at Quantum Economics.

This is why, according to Deane, upgrade processes are thoroughly tested, retested, and validated over long periods of time.

Many members of the community recall the disastrous migration of 2013, when an upgrade gone wrong resulted in bitcoin temporarily splitting in half.

"You don't want the protocol's clients or miners to be out of sync." Nic Carter, a founding partner at Castle Island Ventures, told CNBC, "That's how catastrophic stuff happens." "We have these extraordinarily long lead periods because we don't want a repeat of 2013."