The eyes of the cryptocurrency world have spent the past few months on Ethereum’s transition to Ethereum 2.0, which finally went live in September after much anticipation and delay. Merge, as it’s known, switched the world’s No. 2 cryptocurrency from proof-of-work mining to an energy-efficient proof-of-stake consensus mechanism.
But the world’s No. 1 cryptocurrency is also fresh off the heels of a major upgrade of late.
It is known as Bitcoin Taproot and it represented the before and after moment of the world’s oldest and largest digital coin.
Read: 5 Things to Do When Your Savings Hit $50,000
When was taproot introduced?
Taproot, the most ambitious upgrade in Bitcoin history, was released at 709,632 blocks on Sunday, November 14, 2021 at 5:15 UTC.
This was the first major upgrade since the Segregated Witness protocol update on August 23, 2017, which improved the way data is stored on the bitcoin blockchain. Mainly designed to improve the efficiency and privacy of the bitcoin network, the Taproot update consists of three Bitcoin Improvement Proposals.
- BIP340 — Schnorr Signatures: This part provides a faster and more secure way to allow transactions that require less data than previous methods. An important feature is that Schnorr signatures are backward compatible with bitcoin’s original cryptographic algorithm, meaning that exchanges, wallets and custodians can choose the new format over time.
- BIP341 – Root root: The upgrade’s namesake, BIP, uses a technique called Merkelized Abstract Syntax Tree to free up the blockchain of existing smart contract transaction data while hiding certain private transaction data.
- BIP342 – Tapscript: This BIP gives bitcoin an improved operational programming language that leverages Taproot and Schnorr technology, while also giving developers the tools to implement future bitcoin improvements more efficiently.
Greater efficiency and privacy: Two sides of the same digital coin
As mentioned earlier, the purpose of the Taproot update was to make the bitcoin network more efficient and more private – and improving one makes it easier to improve the other.
By giving less transaction information to the blockchain, less transaction information is visible to everyone in bitcoin’s public blockchain ledger. At the same time, the reduction in transaction data makes room for more transactions per block, which increases throughput and reduces fees.
Taproot Improves Bitcoin’s Capacity for Smart Contracts
Improved privacy and efficiency are the main goals of Taproot, but the upgrade also allows for greater smart contract flexibility – and this may be the update’s most consistent long-term contribution.
According to IBM, “Smart contracts work by following simple “if/when…then…” statements written in code on the blockchain.
Smart contracts are stored on the blockchain and work when certain predefined conditions are met. They are used to automatically execute contracts and notify all interested parties immediately without the involvement of an intermediary. They can also automate workflows and trigger the next action in a predefined chain of events.
In smart contracts, there is no paperwork and no wasted time hashing out details or reconciling errors. Because there are no intermediaries, contracting parties avoid the fees and time delays associated with third-party involvement. Smart contracts provide trust, transparency and the highest level of security.
One way to think of them is like a vending machine that can automatically dispense a can of soda without the permission or help of a third party after verifying that the recipient has deposited enough money.
The DeFi way?
Ethereum was the first blockchain to include smart contract capabilities. This ability has made ethereum a prime base for the NFT and DeFi craze of 2020-21, making ETH the world’s top altcoin.
Fabian Schar, professor of distributed ledger technology and fintech at the University of Basel and managing director of the Center for Innovative Finance, wrote to the International Monetary Fund (IMF) that decentralized finance (DeFi) “uses public blockchain networks to carry out transactions seamlessly. having to rely on centralized service providers such as custodians, central clearing houses or escrow agents. Instead, these roles are taken over by so-called smart contracts.
Conducting decentralized financial transactions without the involvement of central authorities such as banks or governments was the central thesis of bitcoin in its conceptual stages. But it is ethereum and its smart contracts capacity that make DeFi a reality.
Bitcoin’s ability to execute smart contracts is more limited than Ethereum’s, but the Taproot update has expanded this limited ability. This expansion could lead to a future where the original cryptocurrency will emerge as a competitor to the world’s best alto in the DeFi space.
What about Bitcoin NFTs?
Ethereum is also home to most of the world’s NFT protocols – and like DeFi, ETH’s dominance in the NFT space can be attributed to its advanced capabilities for smart contracts.
On the other hand, the Bitcoin blockchain cannot support NFTs – sort of.
“The Bitcoin blockchain does not natively support NFTs, but they can be minted on e.g. bitcoin-powered blockchains or Layer-2,” wrote Juhi Mirza, a cryptocurrency expert writing for Planet Crypto.
He explained that the blockchain, called Stacks, “runs smart contracts by running transactions on bitcoin. Stacks allows users or developers to create NFTs or NFT markets that can be secured through the bitcoin network.
Several NFT platforms, including Boom, StacksArt and STXNFT, already use Stacks to create and generate NFTs. But as of today, bitcoin holders still need to convert their BTC to ETH if they want to buy NFT on the ethereum network.
As with DeFi, it remains to be seen whether the Taproot upgrade and the enhanced smart contract capability it gives Bitcoin will create a future where Bitcoin will be a player in the NFT space.
What is a BTC Taproot Address?
Bitcoin addresses are 26-35 alphanumeric character identifiers used by coin holders to purchase bitcoins. According to Bitcoin Design, there are several different address formats, each based on different specifications.
The newest among them is pay-to-taproot, also known as P2TR or Bech32m addresses, or simply Taproot addresses.
Case-insensitive base root addresses begin with the prefix “bc1p”. An example of a P2TR Taproot address is bc1pmzfrwwndsqmk5yh69yjr5lfgfg4ev8c0tsc06e.
Previous addresses that are still in active formats thanks to the soft fork’s backwards compatibility include:
- SegWit Address: witness-payment-public-key-hash (P2WPKH)
- Script URL: pay to script hash (P2SH)
- Old address: pay-to-pubkey-hash (P2PKH).
Who developed Bitcoin Taproot?
According to Cointelegraph, Bitcoin Core developers have been planning to expand the capacity of SegWit since its introduction in 2017. The following year in 2018, well-known bitcoin coin developer Greg Maxwell was the first to propose an update to Taproot.
A different Bitcoin Core developer named Pieter Wuille created three BIPs that will form the structure of Taproot.
In 2020, a trio of developers Tim Ruffing, AJ Townes, and Jonas Nick joined the project and joined Maxwell and Wuille in implementing the upgrade.
In June 2021, the Taproot upgrade was shut down when the network reached the required critical consensus mark of 90% among bitcoin miners, paving the way for the upgrade to take place five months later in November.
How Will Taproot Affect Bitcoin Price?
Taproot improved the bitcoin blockchain during one of the most influential periods in cryptocurrency history.
On November 10, 2021, four days before Taproot was launched, bitcoin hit an all-time high of $68,000. While it looked like the anticipation of Taproot had driven Bitcoin to its highest value, the two events did not exist in a vacuum.
Every major cryptocurrency peaked around the same time in November 2021 as the stock market’s major indices — but a bear market was coming for all of them.
Bitcoin’s price began to crater a few days later, and by early December, BTC was trading below $50,000. It was below $40,000 in late January 2022, below $30,000 in late May, and below $20,000 in early summer. Today, BTC remains in a difficult position, trading around $20,500.
While it overlaps with both, Taproot can neither claim bitcoin’s peak nor its subsequent slide.
BTC was just one casualty in the brutal “crypto winter” that defined the market in 2022. Ethereum, cardano, and polygon had lost nearly 60% of their value by September, while many other top tokens were in the same dismal state. The S&P 500 also fell into a deep bear market at the same time.
In 2021, Taproot launched as bitcoin’s first major upgrade in four years. It made the network faster, more efficient, more secure and more private, and increased the ability to execute smart contracts – but don’t base your investment decisions on the hoopla surrounding the upgrade.
You should base your decision on whether or not to buy bitcoins solely on your investment strategy. As BTC’s price collapse proves, Taproot is not a magic bullet, and if bitcoin didn’t fit your strategy yesterday, it shouldn’t fit today.
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