Over the weekend, Bitcoin enthusiasts huddled around their screens as they waited for miners to mine Bitcoin block 709,632. The block was mined sometime around midnight EST and with it, three highly anticipated technological upgrades to Bitcoin were officially implemented into the protocol. Collectively, these three upgrades are referred to as “Taproot”.
In short, Taproot is designed to improve Bitcoin’s security, privacy and efficiency.
The expected benefits of the upgrades include:
Consolidation of all types of bitcoin transaction outputs into a singular Taproot output that will improve privacy by making different types of transactions indistinguishable.Improved Bitcoin programmability.Enhanced data efficiency by using a more efficient signature algorithm and transaction structuring method.Boosted security due to the addition of a new signature scheme, making it a dual-signature blockchain.
There are a few potential drawbacks to the upgrade, but they’re minimal in the face of the benefits and only reveal themselves if Taproot is only partially adopted by network participants (only 54% of Bitcoin nodes enforce Taproot right now, a number which has ticked up in recent days).
Read the full report, The Investor’s Perspective on the Bitcoin Taproot Upgrade, here.
There are also a few misconceptions of what Taproot means for network participants, stakeholders and ultimately investors, the main one being that Taproot enables flexible smart contracting capabilities that will rival the most popular smart contract blockchain, Ethereum.
Before Taproot, Bitcoin did have native smart contract capabilities, as Bitcoin transactions could be programmed to time payments when certain constraints are met or missed. One of the most popular implementations of Bitcoin smart contracts is the Lightning Network, which is being used in El Salvador to enable bitcoin-denominated commerce. However, in general, transactions involving Bitcoin contracts are data-heavy and bad for privacy.
With Taproot, on-chain smart contracts are more viable by breaking up the execution of Bitcoin scripts. In addition, Taproot improves the usability of what are known as Discreet Log Contracts (DLCs) which can be used to construct more complicated Bitcoin smart contracts. However, the implication that Taproot will make Bitcoin a smart contracting blockchain is misplaced.
Instead the two main takeaways for users, stakeholders and investors from the Taproot upgrade include:
Bitcoin proves that it is a technology that can upgrade in the face of widespread consensus, which is difficult to achieve. With this, as the “bitcoin the asset” narrative is gaining mainstream popularity, the “Bitcoin the technology” narrative is hot on its heels; not to replace it, but to augment it.Taproot lays the groundwork and foundation for potentially interesting use cases down the road that developers can build on – both from a protocol-wide level and a company-by-company level.
In short, while the Taproot upgrade is a monumental part of the history of Bitcoin, there is still work to be done. A relatively popular cartoon that surfaces around important times in Bitcoin history, such as around the halving, does a great job showing this. The cartoon shows a stick figure hunched over a computer watching Bitcoin blocks being mined with a serious look on its face. When the miners mine block 709,632, the stick figure raises some fireworks above its head. After that, its back to seriously watching the blockchain.
— Mining Memo (@miningmemo) November 14, 2021
In general, the community celebrated block 709,632 with brief fireworks, but then it was back to work.
Tick tock, another block.