Bitcoin Investors Beware: Taproot Is Here. What Does It Mean?

The Bitcoin community eagerly waited for the network’s first major update in years. In 2017, Bitcoin saw the Segregated Witness (SegWit) update, and development seemed to have halted.

However, the much-awaited Taproot update, comprised of three Bitcoin Improvement Proposals (BIPs), adds enhanced privacy and efficiency over Bitcoin’s blockchain. The three updates include BIP340 (BIP – Schnorr), BIP341 (BIP – Taproot), BIP342 (BIP – Tapscript).

The first update, BIP-Schnorr, adds a faster, more secure, and less data-intensive way to authorize transactions - “Schnorr Signatures”.  Schnorr provides the infrastructure for implementing BIP – Taproot, which uses a technique called “MAST” to enable less smart contract transaction data to the blockchain. The third and final update, BIP – Tapscript, adds an upgraded transaction programming language, utilizing Schnorr and Taproot technology.

BIP340 – Schnorr signature also adds a new technique, called “key aggregation,” enabling multi-signature transactions to be conducted with the same amount of data to the Bitcoin blockchain as a standard, single signature transaction.

BIP341 – Taproot implements the Merklized Alternative Script Trees (MAST), which allows only the executed conditions of a smart contract transaction to be committed to the blockchain. Prior to the update, the smart contract pushed out the full details of all other possible outcomes.

BIP342 – Tapscript augments the Script coding language for transactions, in order to incorporate Schnorr Signatures and Taproot technology for those that opt-in to the upgrade.

Bitcoin investors could benefit from the update, as the network proves to be upgradable in the face of widespread consensus.

The technology behind Bitcoin is proving to be just as valuable as the asset itself, with the technology narrative hot on its heels.

Bitcoin core developer Gregory Maxwell first proposed the Taproot update pack back in January 2018. However, the process of support and consensus for implementing the update took a couple of years to finalize, with Bitcoin miners agreeing on June 12, 2021.

Taproot is a game-changer for Bitcoin because it now enhances on-chain smart contracts by breaking up the execution of Bitcoin scripts. Furthermore, Taproot enhances the usability of Discreet Log Contracts (DLC), which can be utilized to push out more complicated Bitcoin smart contracts.

The impact of the update, albeit not evident at first sight, can be fundamental for the future of Bitcoin. Many enthusiasts believe Taproot would lay the foundation for the birth of decentralized finance (DeFi) protocols and applications, running on Bitcoin’s blockchain.

Furthermore, Taproot would provide an ideal condition set for the rapid and efficient scaling of the Lightning Network, moving Bitcoin’s utility from a “store of value” to also a “medium of exchange,” cementing Bitcoin’s place as a peer-to-peer digital currency.