Bitcoin is about to upgrade. Four years ago, Bitcoin experienced a civil war surrounding its technological limitations. A firm belief in block size, which limits the amount of information that can be contained in a block, splits the Bitcoin network (BTC) into Bitcoin Cash (BCH) and further into Bitcoin SV (BSV) . Since then, the original Bitcoin still dominates, while the other Bitcoins have lagged far behind in price appreciation. Last month, when 90% of nodes said they supported the new upgrade (nicknamed Taproot) scheduled to go live in November, the Bitcoin network reached an overwhelming consensus.
The Taproot upgrade will do many things to improve the technical foundation of Bitcoin’s operation. Mainly focusing on adding privacy features, it will also improve the network’s ability to run smart contracts. As institutions’ interest in the technology soars, this main feature has pushed Ethereum to a record high this year.
Although ordinary Bitcoin users will not notice much change, various layer 2 solutions and side chains (such as Lightning Network and Liquid) will experience huge improvements. Currently, these protocols built on Bitcoin are different from ordinary on-chain transactions because they need to reveal all the complex rules and scripts that they run when interacting with the blockchain. Taproot implements an improved signature method called Schnorr signature, which allows these programs to display only the exact rules used for each transaction, rather than all of them. Ultimately, this allows these complex transactions to appear on the chain in the same way as ordinary wallet-to-wallet transactions. This not only improves privacy by making it more difficult to pick out these complex transactions during chain analysis, but it also saves block space and increases transaction speed.
These improvements will incentivize developers to build more complex applications on top of Bitcoin, opening up a world full of possibilities, especially increasing Bitcoin’s ability to participate in the world of decentralized finance (DeFi), which has become other blockchains The most hyped use case is Ethereum. DeFi allows ordinary people to eliminate institutional intermediaries in the financial world, enabling users to lend, borrow, and participate in countless other transactions that usually require the assistance of banks or other financial institutions. In fact, just last week, Square CEO Jack Dorsey announced that his company has built a DeFi platform on top of Bitcoin.
For investors, this is an important reminder that Bitcoin is a technology that is still evolving in its early stages. The upgrade of the agreement has high potential for returns and risks. Any changes to this technology may introduce errors, thereby threatening confidence in the entire cryptocurrency field. This is why these upgrades are highly controversial and infrequent, and why developers will thoroughly test, retest and review them over and over again before deployment and adoption.
How the market will react remains to be seen, as Bitcoin’s famous volatility tends to react unpredictably to good and bad news. What is certain, however, is that Taproot will greatly improve the ability of institutions to adopt, because it can increase privacy, speed, and reduce the cost of more complex interactions that these participants may participate in.
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