The first upgrade to Bitcoin in four years has been completed and is now live.
Called the “Taproot update,” the change means greater transaction privacy and efficiency, and unlocks the potential for smart contracts using Bitcoin’s underlying blockchain, which can be used to eliminate middlemen such as banks from financial transactions.
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.
A big part of the Taproot update has to do with digital signatures, which are like the fingerprint an individual leaves on every transaction.
Currently, the cryptocurrency uses something called the “Elliptic Curve Digital Signature Algorithm,” which creates a signature from the private key that controls a Bitcoin wallet, and ensures that Bitcoin can only be spent by the rightful owner.
Taproot has added something known as Schnorr signatures, which essentially makes multi-signature transactions unreadable.
It won’t translate to greater anonymity for an individual Bitcoin address on the public blockchain, but it will make simple transactions indistinguishable from those that are more complex and comprised of multiple signatures.
In practice, that means greater privacy, because keys won’t have as much exposure on the chain.
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 rent each month to registering a motor vehicle.
Taproot makes smart contracts cheaper and smaller, in terms of the space they take up on the blockchain.
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. Developers had already begun to build on Lightning in anticipation of the upgrade, which will allow for highly specific contracts.
As more programmers build smart contracts on top of Bitcoin’s blockchain, Bitcoin could become more of a player in the world of decentralized finance (DeFi), a term used to describe financial applications designed to cut out the middleman.
Bitcoin is the world’s biggest cryptocurrency. Its current price is just under $66,000 U.S.
