Home / Money / Bitcoin Taproot upgrade: What is it and how will it impact investors?

Bitcoin’s Taproot upgrade, which is the first upgrade to the crypto asset in four years, was recently approved by miners around the world. The upgrade has received a consensus from a majority of stakeholders and many experts believe this could be a revolutionary moment for the world’s biggest cryptocurrency as the support from miners in accepting and bringing in this upgrade was overwhelming.

The Taproot upgrade is set to come into effect from November.

What is the upgrade?

According to Sathvik Vishwanath, co-founder and CEO, Unocoin, this upgrade has two sides. “On the first side, it is expected to bring in better privacy and transparency in transaction, and on the other side, this is the first time the smart contracts capability is being added to the bitcoin blockchain network. These features are already available in other different coins and as it has been a successful experiment in them so far, it is even getting copied in bitcoin, which is the world's popular and widely spread cryptocurrency," he said.

Early adopters of blockchain, and especially bitcoin, have advocated the huge potential of the technology. Over the years, several changes have been implemented to existing cryptocurrencies and thousands of newer cryptos have come into this marketplace.

Bitcoin, despite being the most popular crypto, had its last major upgrade four years back. “Many referred to the previous upgrade as a 'civil war' of sorts as it caused a massive ideological divide," said Edul Patel, CEO and co-founder, Mudrex, an algo-based crypto trading platform.

Why was this upgrade needed?

The Taproot upgrade for bitcoin would allow smart contracts to be run efficiently and cheaply. As of now, smart contracts are usually run on the ethereum network because of the higher efficiency. However, with the Taproot upgrade, Bitcoin has the potential to elevate itself and integrate with mainstream finance. Moreover, bitcoin is a public blockchain, and anyone can monitor the transactions that occur on the network, which is a cause of concern for many.

“Taproot upgrade for bitcoin would allow smart contracts to take up lesser space on the network. Technologically speaking, the bitcoin network currently uses the 'Elliptic Curve Digital Signature algorithm’, which occupies more space. It will be switched over to the 'Schnorr signatures' that will make the simpler transactions potentially indistinguishable from complex transactions. It translates into greater anonymity in the network while maintaining transparency," said Patel.

Currently, running smart contracts on bitcoin's core protocol layer is not exactly feasible. It is quite expensive and time-consuming, thereby rendering it almost useless. Many experts suggest that smart contracts would be one of the key selling points for Taproot. Smart contracts can be used for almost any trivial financial transaction such as paying utility bills to pay rent, among others.

How will it impact investors?

The movement in the price of cryptocurrencies depends on the practical use cases of the digital asset that are adopted by the masses.

“Bitcoin's Taproot upgrade might just be the key element that would propel it into mainstream finance. The bottom line is the kind of revolution that the Taproot upgrade might bring for Bitcoin is phenomenal," said Patel.

Abhinav Kaul
Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
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