The first Bitcoin upgrade in four years has been approved by miners around the world. This represents a rare moment of consensus among stakeholders. Crypto experts say it's a very big step for the world's most popular cryptocurrency. The upgrade is called Taproot, and it's scheduled to take effect in November.
When that happens, it means greater privacy and efficiency in transactions, and most importantly, the update unlocks the potential of smart contracts, a key feature of blockchain technology that eliminates middlemen for even the most complex transactions. Taproot is important because it opens up a wide range of opportunities for entrepreneurs interested in expanding the use of Bitcoin.
And unlike the 2017 Bitcoin promotion - which caused an ideological split - Taproot has almost universal support. This is partly because these changes are somewhat incremental improvements to the code.
Bitcoin's transformation is all about digital signatures, which you can think of as the fingerprint individual leaves on every transaction they make. Currently, the cryptocurrency uses something called the Elliptic Curve Digital Signature Algorithm, which is generated from the private key that controls the wallet and ensures that the coin is only spent by the legitimate owner.
Taproot turns into something known as Schnorr signatures, which makes multi-signature transactions unreadable. In practice, this means more privacy, because your keys won't have much exposure on the chain.
Not only will this translate into more anonymization of your individual Bitcoin address across the public blockchain, but it does make simple transactions indistinguishable from more complex ones consisting of multiple signatures.
These supported signatures are a game-changer for smart contracts, which are self-executing agreements. In theory, smart contracts can be used for almost any type of transaction, from paying rent each month to registering your car. Taproot makes smart contracts cheaper and less expensive in terms of the space they take up on the blockchain.
Currently, smart contracts can be created via the Bitcoin core protocol layer and via the Lightning Network, a Bitcoin-based payments platform that enables instant transactions.
Usually, smart contracts executed over the Lightning Network result in faster and less expensive transactions. And developers are starting to build on the Lightning Network, in anticipation of the upgrade, which allows for very specific contracts. Smart contracts are the most important thing for Taproot upgrade, as smart contracts are the primary driver of innovation on the Ethereum network.
Smart contracts give you the opportunity to build applications and businesses on the blockchain. And given that more programmers are building smart contracts on top of the blockchain, there is also the potential for Bitcoin to become more effective in the world of DeFi.