Taproot, the largest upgrade to the Bitcoin (BTC) protocol since SegWit in 2017, was activated on Sunday morning, November 14, 2021. As an upgrade, it is a bundle of technical improvements that combined provide greater efficiency and privacy.

Taproot is a soft fork. That is, the upgrade has not created two separate versions (hard forks) of Bitcoin. In fact, Taproot is supported by the vast majority of the Bitcoin community: everyone is still on the same team!

The benefits of Taproot

Taproot makes Bitcoin transactions:

• More scalable and cheaper: Taproot uses a different algorithm that puts digital signatures on transactions, called Schnorr. This algorithm is faster and uses less storage space. Multi-signature transactions, for example, can be processed about three times more efficient. (Multi-signature or multi-sig means that multiple parties must sign for a transaction)
• More private: it becomes more difficult to track the nature of transactions based on public addresses. Simple transactions are now indistinguishable from more complex ones, for example, transactions with multiple signatories.

We need to clarify the aspect of privacy. Before Taproot, you could see on the blockchain the difference between addresses that were single signature and multi-signature. Taproot puts these different types of transactions under the same guise.

This provides more efficiency and privacy: the protocol is no longer forced to reveal information of all signatories. Bitcoin developer and author Jimmy Song compares it to locks on your house: before Taproot, everyone could see what type of lock you used. After Taproot, people can no longer see what type of lock someone is using.

New applications: easier programmable smart contracts

Taproot is the next step in the evolution of smart contracts on Bitcoin. Smart contracts were already possible but now it has become easier for developers to combine conditions. If condition A is met, AND IF Bob has signed AND IF Alice signs within a certain time frame, THEN transfer this amount to Charlie.

Will Bitcoin now compete with Ethereum in the smart contract space? Not entirely, as Ethereum remains much more flexible when it comes to smart contracts. But new and useful functionality will be available to Bitcoin holders. For example, Jimmy Song speculates that Taproot will make it easy to back up your wallet with the help of friends. 'I expect that in a few years, everyone will have their wallet backed up, allowing you to use, say, the help of three friends to get your funds back if you lose your wallet on your phone.'

Just because Taproot is activated doesn't mean the above functionality is available right away. In the example of wallet backups, the developers of this wallet software must first make it compatible with Taproot. In the coming months and years, we will see if this indeed will happen.

What does this mean for the price of Bitcoin?

A saying in the financial markets is: buy the rumour, sell the news. In other words, prices rise in anticipation of the news event, only to go down again once the news event has happened. Will it go the same way in this case? A quick tour of analysts shows that most do not expect a significant price drop. The news comes during a bull market for both Bitcoin and the entire crypto market. On top of that, Taproot is an upgrade to the protocol which was activated without major hassles. Its successful activation is fundamentally good news for Bitcoin as a stable protocol that still has room for improvement.