What it means for investors

The first bitcoin upgrade in four years has just gone live. It is a rare moment of consensus among stakeholders, and it’s a big deal for the world’s most popular cryptocurrency. 

The Taproot update means greater transaction privacy and efficiency – and crucially, it will unlock the potential for smart contracts, which can be used to eliminate middlemen from transactions. 

“Taproot matters, because it opens a breadth of opportunity for entrepreneurs interested in expanding bitcoin’s utility,” said Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark.

Unlike bitcoin’s 2017 upgrade – referred to as the “last civil war” because of the contentious ideological divide separating adherents – Taproot has near universal support, in part because these changes involve fairly incremental improvements to the code.


What’s changing

Smart contracts

These souped-up signatures are also a game changer for smart contracts, which are self-executing agreements that live on the blockchain. Smart contracts could theoretically be used for practically any kind of transaction, from paying your rent each month, to registering your vehicle.

Taproot makes smart contracts cheaper and smaller, in terms of the space they take up on the blockchain. Killeen says that this enhanced functionality and efficiency presents “mind blowing potential.” 

Currently, smart contracts can be created both on bitcoin’s core protocol layer and on the Lightning Network, a payments platform built on bitcoin, which enables instant transactions. Smart contracts executed on the Lightning Network typically lead to faster and less costly transactions.

“Lightning transactions can be fractions of a penny…while a bitcoin transaction at the core protocol layer can be much more expensive than that,” explained Killeen.

Developers had already begun to build on Lightning in anticipation of the upgrade, which will allow for highly specific contracts.

“The most important thing for Taproot is…smart contracts,” said Fred Thiel, CEO of cryptocurrency mining specialist Marathon Digital Holdings. “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.”

As more programmers build smart contracts on top of bitcoin’s blockchain, bitcoin could become more of a player in the world of DeFi, or decentralized finance, a term used to describe financial applications designed to cut out the middleman.

Today, ethereum dominates as the blockchain of choice for these apps, also referred to as “dApps.”

Why the wait