Bitcoin upgrade – what is it and why it matters?

16 Nov 2021

The first Bitcoin upgrade in four years went live over the weekend.
 
Known as Taproot, the update means higher levels of transaction privacy and efficiency, but perhaps most importantly it will unlock the potential for smart contracts, which can be used to remove middlemen from transactions. 
 
“The most important thing for Taproot is...smart contracts,” Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings told CNBC.
 
“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.”
 
Other key benefits:
 
- Consolidation of all types of Bitcoin transaction outputs into a singular Taproot output that will improve privacy by making different types of transactions indistinguishable.
 
- Improved Bitcoin programmability.
 
- Enhanced data efficiency by using a more efficient signature algorithm and transaction structuring method.
 
- Enhanced security thanks to the addition of a new signature scheme, making it a dual-signature blockchain.
 
The upgrade was originally scheduled for June but it was delayed in order to give enough time for testing and reducing the likelihood of a glitch.
 
The Bitcoin community is cautious as it remembers the badly managed migration of 2013, when an upgrade went wrong and resulted in the cryptocurrency temporarily splitting in half.
 
The impact of Taproot appeared to be already priced into the Bitcoin’s price at the weekend. Anto Bukov, the co-founder of 1inch Network, noted: “We note interesting technical improvements in Taproot, but it hardly will bring any user impact except for marketing.”
 
Meanwhile, Ben Caselin, head of research and strategy at AAX, a cryptocurrency exchange, told Cointelegraph: “The immediate soft fork is priced in already. Anyone who understands and follows Bitcoin has been aware of Taproot and will have adjusted exposure accordingly. Nonetheless, since Bitcoin is still under its fair value and a further surge this month is widely expected, Taproot might provide the impetus. Nonetheless, in terms of its potential, Taproot has not been priced in at all.”