Bitcoin’s Taproot Update Is Live: What Does This Mean for Investors?

Taproot, the biggest Bitcoin update since 2017, went live Sunday. What does the new protocol mean for the digital currency, and how has it impacted the coin's price?

Bitcoin’s most substantial update in four years is finally live. The Taproot update has been the subject of discussion on social media for months leading up to its launch date. Bitcoin stakeholders rarely reach a consensus on new standards for the digital currency, so this protocol update has investors’ attention.

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The previous Bitcoin update, which took place in 2017, was highly divisive among stakeholders. Commentators online called the update Bitcoin’s “last civil war” due to the volume of infighting in the community. The Taproot update, on the other hand, has been received well by nearly all stakeholders. This protocol refresh is incremental, adding new functionality to the standard while tightening up security and transaction efficiency.

“Taproot matters, because it opens a breadth of opportunity for entrepreneurs interested in expanding bitcoin’s utility,” stated Stillmark founder and managing partner Alyse Killeen. Taproot will expand Bitcoin’s functionality by adding more support for smart contracts, digital agreements that can live in the code of a crypto transaction. Beyond this, the new protocols will tighten the anonymity of Bitcoin transactions while increasing their efficiency on the blockchain.

Why Did It Take So Long?

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Crypto enthusiasts might be a bit confused by the timing of Taproot’s rollout on Sunday. Ninety percent of stakeholders signaled their support for the move back in June, locking the update in as the future of the standard’s code. That five-month wait is part of Bitcoin’s core design: it gives miners time to test the new system for bugs before sending it live.

If any bugs occurred in the blockchain, the results could be catastrophic. Analysts predict that a big enough bug in a cryptocurrency’s core architecture could collapse that coin’s market, which would make it worthless in a matter of hours. Thankfully, Taproot’s rollout took place without any coin-breaking bugs.

Under the Hood

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Taproot is a complex upgrade for Bitcoin, but in plain terms, it’s a protocol refresh that alters the digital signatures used to verify transactions. These signatures define cryptocurrency, as each user leaves one behind as an identifying marker whenever they trade Bitcoin. When a new transaction takes place, it’s added to a digital ledger called the blockchain, along with the user’s digital signature.

Before Taproot, the Bitcoin network used only one form of digital verification: the Elliptic Curve Digital Signature Algorithm. Taproot, meanwhile, replaces this with a system called Schnorr signatures. The Schnorr standard encrypts any transactions that use multiple signatures, making them nearly impossible to read without the right decoding key.

In practice, Schnorr will result in simple purchases by individual users appearing indistinguishable from more substantial and involved transactions involving numerous parties. Bitcoin enthusiasts react well to changes that tighten up anonymity within the standard, which helped Taproot win over the majority of stakeholders.

Smart Contracts

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Perhaps the most notable change in the update is the streamlining of smart contracts. Users can apply these agreements to their transactions, writing in conditions under which Bitcoin changes hands. Bitcoin holders could theoretically use smart contracts for any transaction, such as settling debts with friends or even paying rent on a recurring schedule.

Smart contracts have been available through Bitcoin’s Lightning Network and its core protocol network for years. However, before Taproot, adding smart contracts to a transaction made it significantly more expensive through energy expenditure. Taproot streamlines these contracts and makes them more efficient, reducing the overhead of incorporating self-policing agreements into Bitcoin transactions.

“Lightning transactions can be fractions of a penny…while a bitcoin transaction at the core protocol layer can be much more expensive than that,” Killeen explained to reporters.

Fred Thiel, the CEO of Marathon Digital Holdings, told reporters, “Smart contracts essentially give you the opportunity to really build applications and businesses on the blockchain.”

Decentralized Finance

Smart contracts are the most compelling case yet for cryptocurrency to enable decentralized finance. Also called DeFi, decentralized finance is crypto enthusiasts’ ideal future of money. Currently, banking institutions dominate the world of monetary transactions, acting as middlemen between almost all value exchanges. Crypto bulls envision a future in which decentralized platforms like Bitcoin and Ethereum replace traditional banking institutions.

Bitcoin’s price is still hovering near its all-time high of $67,000 per coin after a blistering rally in October. Bizarrely, the currency’s trading price didn’t react to Taproot’s rollout on Monday. Some analysts think it could be too early to see any movement in the currency, given how incremental Taproot is. Others suggest that the new protocol might be too complex for investors to develop strong feelings about right away.

Meanwhile, some analysts are still calling on the coin to double in value before the end of the year. Bullish sentiment from investors continues to drive the currency’s price, with Kevin Svenson on Twitter predicting Bitcoin will surpass $200,000 soon. As of Monday morning, the digital standard is trading above $65,000 per coin.

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