Erik Weijers, a year ago
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!
Taproot makes Bitcoin transactions:
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.
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.
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.
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Bitcoin is decentralized and secure. The downside of both features is that Bitcoin doesn’t scale very well and cannot execute complex smart contracts as Ethereum does. This limits its use and while the mother of cryptocurrencies still stands tall, it needs to change and adapt to the existing demand. The most promising technical approach to solve at least one of both issues is the so-called Lightning Network. It is a protocol that runs on top of Bitcoin and offers almost instant finality of transactions by facilitating them off-chain and confirming them at a later point in time. In this sense, the Lightning Network is the transactional layer that still profits from Bitcoin’s security and finality of its blockchain. TARO is a brand-new invention that was brought to life by Lightning Labs and just introduced in late September 2022 as an alpha version.
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