Bitcoin’s biggest upgrade in four years — the Taproot update — went live on Sunday at block 709,632. The new upgrade offers greater scalability, privacy and efficiency. It combines the Schnorr signature scheme with MAST (Merklized Alternative Script Tree) and leverages a new scripting language called Tapscript.

“The Taproot upgrade means many things for Bitcoin — improved privacy and efficiency, which sets a foundation for smart contracts on Bitcoin. This opens up all sorts of possibilities that complements Bitcoin’s layered architecture,” said Jeff Yew, CEO of Monochrome Asset Management, Australia’s first fund to offer institutional-grade exposure to Bitcoin. 

In layman’s terms, there are three important parts to the upgrade. First comes the signature — the Elliptic Curve Digital Signature Algorithm was replaced by the Schnorr signature scheme. The new signature scheme is “far more sophisticated,” “lightweight,” and “flexible,” Jonathon Miller, Australia managing director at crypto exchange Kraken, told Forkast.News. 

The Schnorr signature scheme makes smart contract transactions appear like every other Bitcoin transaction on the blockchain — you cannot tell the difference between multi-signature smart contracts and peer-to-peer transactions from the blockchain record. This means greater privacy, not for peer-to-peer simple transactions, but for complex transactions involving multiple signatures. 

The second part of the update is the adoption of Tapscript — a new programming language. According to Miller, Tapscript is far more programmable than the previous language used to add Bitcoin transactions on the blockchain. This will increase smart contract functionality on the Bitcoin blockchain and allow for smoother upgrades in the future, Miller said. 

“The Taproot upgrade enables greater transaction privacy along with efficiency. And essentially, what we’re going to start to see is it is going to allow smart contracts on the Bitcoin platform now,” Tony Sycamore, financial markets analyst at City Index, told Forkast.News. 

“Developers can now start developing applications on Bitcoin. Businesses can start developing platforms on Bitcoin. It’s really been Ethereum that has dominated this space, but it’s a very big improvement for the Bitcoin network,” Sycamore added. 

The third and most important part of the Taproot upgrade brings about significant improvements in the structure of Bitcoin transactions. The update lowers the data size of smart contracts, i.e., the amount of data required to record smart contract transactions on the blockchain. This, in turn, reduces the cost of transactions and boosts scalability. 

When it comes to smart contracts, Ethereum is a clear winner. In June 2021, over 2.7 million smart contracts were deployed on the Ethereum network. Smart contracts have driven innovation on the Ethereum network as it allows for new technology implementations and use cases. Now that smart contracts will become more efficient on the Bitcoin blockchain, it is “hoping to steal part of that segment [from Ethereum], and it probably will,” although Ethereum will continue to enjoy first-mover advantage for some time, Sycamore said. 

Echoing his thoughts, Miller said: “I think Bitcoin’s core purpose will not change in the short run. However, the capacity to use Bitcoin for more complex computational transactions or more DeFi [decentralized finance] style implementations, will be something that would be very important to watch over the coming years.”

Bitcoin is a store of value but “being able to leverage that value, deploy it as capital and collateral in a seamless way, rather than having to wrap it up and deploy it on another network,” is a huge step forward, Miller said. 

At the Bitcoin and Beyond Virtual Summit 2021, Brittany Laughlin, executive director of Stacks Foundation, an open-source network for building smart-contract and decentralized finance bridges to the Bitcoin blockchain, said that the locked value in Bitcoin represents unrealized gains. “What we’ve seen from DeFi and other categories is that people want to be able to leverage this asset they have in the same way they do in the real world where you can leverage against your house or you can leverage capital stocks that you own,” Laughlin said. 

Bitcoin price reaction

The Bitcoin blockchain’s last big update, called SegWit, was in 2017 when the disagreement between miners regarding the update led to a hard fork, and Bitcoin Cash emerged. Four years is a long time, especially in the crypto world where prices skyrocket or bottom out within minutes, and it signifies the difficulty in achieving consensus among stakeholders of the world’s largest cryptocurrency. 

Therefore, the Taproot upgrade has been in the making for years. Miners have signalled their support for the upgrade almost unanimously and the upgrade was locked for deployment in June. So the update, while “it’s incredibly significant simply because it’s an upgrade [after four years] and it’s very welcome,” Miller said, has had little impact on the price of the asset. 

“The price reaction has been subdued,” Sycamore said. Since the upgrade was well known and agreed upon months in advance, it’s not a market driver at this point, he added. Bitcoin has been trading marginally high since the deployment of the upgrade at around US$66,033.31 at the time of publication. 

But despite the subdued price movement, the Taproot upgrade makes Bitcoin “more attractive,” Sycamore added. “Fundamentally, there’s more uses for Bitcoin now, so anything that makes a product more usable should make the value of the product greater.”