By mid-2021, the cryptocurrency industry was eagerly counting on bitcoin’s Taproot correction, to bounce back from the market’s decline that wiped off billions of dollars, depleting the market’s value by half.
The correction was billed to take place in November, and has now come to pass, introducing new features in bitcoin technology that are believed to be key in the leading cryptocurrency’s future growth.
Part of the features of the Taproot update are greater transaction privacy and efficiency, the ability to unlock the potential for smart contracts, which can be used to eliminate middlemen from transactions.
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“Taproot matters, because it opens a breadth of opportunity for entrepreneurs interested in expanding bitcoin’s utility,” said Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark.
The last time bitcoin underwent such a significant upgrade was in 2017. But the upgrade was called “last civil war” because it divided bitcoin adherents with its controversial ideas. But unlike the last civil war, Taproot was generally accepted, partly because ‘the changes involve fairly incremental improvements to the code.’
Besides volatility, bitcoin’s other challenge has been the growing concern about its carbon footprint, a large part of reasons for its plunge earlier in the year. There was expectation that the Taproot upgrade would in some way, address the carbon concern. What really changed?
What is changing according to CNBC.
A big part of bitcoin’s makeover has to do with digital signatures, which are like the fingerprint an individual leaves on every transaction.
Right now, the cryptocurrency uses something called the “Elliptic Curve Digital Signature Algorithm,” which creates a signature from the private key that controls a bitcoin wallet, and ensures that bitcoin can only be spent by the rightful owner.
Taproot will add something known as Schnorr signatures, which essentially makes multi-signature transactions unreadable, according to bitcoin miner Alejandro De La Torre.
It won’t translate to greater anonymity for your individual bitcoin address on the public blockchain, but it will make simple transactions indistinguishable from those that are more complex and comprised of multiple signatures.
In practice, that means greater privacy, because your keys won’t have as much exposure on the chain. “You can kind of hide who you are a little bit better, which is good,” said bitcoin mining engineer Brandon Arvanaghi, who now runs Meow, a company that enables corporate treasury participation in crypto markets.
Smart contracts
These souped-up signatures are also a game changer for smart contracts, which are self-executing agreements that live on the blockchain. Smart contracts could theoretically be used for practically any kind of transaction, from paying your rent each month, to registering your vehicle.
Taproot makes smart contracts cheaper and smaller, in terms of the space they take up on the blockchain. Killeen says that this enhanced functionality and efficiency presents “mind blowing potential.”
Currently, smart contracts can be created both on bitcoin’s core protocol layer and on the Lightning Network, a payments platform built on bitcoin, which enables instant transactions. Smart contracts executed on the Lightning Network typically lead to faster and less costly 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,” explained Killeen.
Developers had already begun to build on Lightning in anticipation of the upgrade, which will allow for highly specific contracts.
“The most important thing for Taproot is…smart contracts,” said Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings. “It’s already the primary driver of innovation on the ethereum network. Smart contracts essentially give you the opportunity to really build applications and businesses on the blockchain.”
As more programmers build smart contracts on top of bitcoin’s blockchain, bitcoin could become more of a player in the world of DeFi, or decentralized finance, a term used to describe financial applications designed to cut out the middleman.
Today, ethereum dominates as the blockchain of choice for these apps, also referred to as “dApps.”
So the Taproot upgrade focuses more on identification and security, which in an era when DeFi, NFT and EFT are becoming the blockchain’s cashcow, have become subjects of concerns. But this means that the concern about bitcoin’s carbon footprint, which has soured the coin’s relationship with cheerleaders like Tesla’s CEO Elon Musk, who is promoting environmental friendly ideology through his electric vehicle company, will linger into the future.